For the first time since 2009, the yield on the 10-year Treasury note rose for seven straight weeks. Among them, the rapid surge in Europe and the United States last Friday, but also once surprised all market participants in a cold sweat. The renewed hunt for the 10-year Treasury note, known as the “anchor of global asset pricing,” makes the Federal Reserve’s March interest rate decision, due this week, all the more crucial.
The 10-year U.S. yield rose to a more than one-year high of 1.642 percent on Friday from 1.624 percent late in New York, up 8.77 basis points on the day, according to market data. Yields on longer-term Treasury bonds all moved higher. The yield on the 20-year Treasury note rose 9.32 basis points to 2.2890 percent. The yield on the 30-year bond rose 8.31 basis points to 2.3776 per cent.
The U.S. Treasury yield curve, a measure of risk sentiment, steepened sharply as a result, with the gap between two-year and 10-year Treasury yields at 148 basis points, the widest since September 2015. The yield on the two-year note rose 0.81 basis point on the day to 0.1470%.
Analysts said the market had been expecting a period of calm after a relatively smooth week of bond issuance, but Friday’s renewed activity in the bond market had completely disrupted the rhythm of many traders. After Friday’s sudden surge, the yield on the benchmark 10-year Treasury note has recovered to the highs set after a disastrous seven-year auction on Feb. 25.
Friday’s bond-market selloff seemed odd: The global sell-off began in Australia, where a late decline in bond futures put some pressure on U.S. Treasuries. Around the same time, there was a big sell-off in 10-year Treasury futures, followed by bulls buying put options as a hedge, a move that would normally weigh on the market.
But on the news, the risk of a further rise in bond yields is not without warning. The US government on Friday formally began disbursing the first $1,400 grant under the Biden Act. Some Americans receive the money at the end of the week. Economists expect that to fuel the recovery in the coming months. A 0.5 per cent rise in the US producer price index released on Friday also supported an extended rally in yields.
In addition, some investors are concerned about upcoming regulatory changes to so-called supplementary leverage ratios, or SLR, that could prompt big Wall Street banks to reduce their securities holdings and lending, according to many analysts. SLR rules require big banks to hold more capital. The waiver expires at the end of this month. So far, the Fed has not said whether an extension is possible. If the waiver is not extended, it could prompt big banks to sell Treasuries and cause yields to climb further.
Long-term U.S. Treasury ETF falls into ‘technical bear market’
On Friday, the $15 billion iShares 20-plus year Treasury ETF(TLT) has fallen 20% from its August peak, entering ‘technical bear market’ territory, against the backdrop of accelerating bond declines.
To some in the industry, that may mean the end of the long bull market in bonds. Bank of America strategist Michael Hartnett and others noted in a note, “We believe this year will be a historic low for inflation and interest rates, and the end of the 40-year bull market in bonds.”
Investors are also accelerating the pace of withdrawals from related fixed-income ETFs. They withdrew $15.4 billion from bond funds in the week ended March 10, the biggest withdrawal in a year, according to Bank of America and EPFR Global.
“With interest rates still low, bond investors could face more losses.” Michael Reynolds, Glenmede’s chief investment officer, said: “We are very cautious about downside risk to fixed income in our clients’ portfolios, which is why we are underweight core fixed income right now.”
Deutsche Bank has now raised its year-end target for 10-year Treasury yields by a full percentage point to 2.25%, citing expectations of strong economic growth and the risk of rising inflationary pressures.