T-Bills at Risk as Fed Paves the Way for Yield Breakdown

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(Bloomberg) – Traffic on the way to higher Treasury yields finally appears to be clearing up as central banks move closer to ending emergency pandemic policies.

After being stuck for months, 10-year Treasury yields crossed the top of a range held since mid-July, topping 1.40% and ending the week at 1.45%. That’s up from the 2021 low of 1.13% set in August.

The bears have emboldened, prompting a new round of short selling, betting that US debt will continue to fall – pushing up yields further. Gaining a lasting victory on this trade will not be easy. The massive jump in yields in the first quarter ran out of steam as the Covid resurgence clouded the outlook for economic growth.

But, for now, a hawkish trend from the Federal Reserve and the Bank of England has paved the way for a further rise in yields.

“Nominal yields are still too low and will increase,” said Gary Pollack, head of fixed income for private wealth management at Deutsche Bank. “But there is an ongoing struggle in the rate market between the fundamentals – which on inflation look positive and support higher yields – and the demand flow techniques of the Fed and foreign buyers. But I think so. that fundamentals will win out eventually and that returns will slowly rise. ”

Fed Chairman Jerome Powell said this week that the central bank could begin in November to cut back on asset purchases that have helped the US economy overcome Covid-19. The exit of such a large bond buyer could allow yields to jump higher.

Officials also updated their forecast (aka the dot plot) for the Fed’s benchmark rate, showing half of them would see an increase by the end of 2022, a more hawkish projection than most. strategists had not foreseen it.

Traders will have a feel for the feasibility in early October when the next monthly jobs report is released.

The bulls heal the losses. U.S. Treasuries are down about 1.8% year-to-date, while global sovereign bonds are down more than 4%, according to Bloomberg indices.

Powell tries to separate rate cut and hike decisions from each other, but appears to be fighting a losing battle. The dot plot updated this week, along with the provisional reduction schedule, prompted derivatives traders to advance their target for the first rise: December 2022 compared to early 2023.

The Bank of England is also fueling higher yields. He spoke of the prospect of an interest rate hike as early as November, causing yields on UK gilts and German Bunds to rise.

Meanwhile, Norway has achieved the first post-pandemic rise among the Group of 10 countries.

“The wave of liquidity from global central banks is only running out of steam,” said Gene Tannuzzo, portfolio manager at Columbia Threadneedle. “There is a mix of central banks moving from an economic tailwind to at least neutral and maybe for the foreseeable future a headwind. There is now a floor below 10-year Treasury yields, with your short-term bogey now probably slipping to around 1.5% to 1.6%. “

The 10-year reached 1.77% in March.

Tannuzzo has a defensive position in long-term Treasuries. It favors variable-rate loans from banks and debts from high-yield corporate issuers which have the prospect of regaining a quality rating.

Momentum indicators, for their part, are supporting higher yields, after 10-year rates significantly exceeded their 50-day moving average, which stood at 1.29% on Friday.

Investors are watching China’s Evergrande debt crisis. And China’s recent regulatory moves, including a ban on crypto transactions, appear to be hurting growth.

“There is a short-term dynamic for yields to continue to rise,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “But we are very cautious about global growth because what China is doing is quite devastating as it is tightening on almost all fronts. We believe Chinese growth will continue to slow.

What to watch:

  • Economic calendar:
    • September 27: durable goods orders; Dallas Fed Manufacturing Activity
    • September 28: Anticipated merchandise trade balance; wholesale and retail stocks; FHFA house price index; S&P CoreLogic house price data; Conference Board Consumer Confidence; Richmond Fed manufacturing index
    • Sep 29: MBA mortgage applications; pending house sale
    • September 30: first applications for unemployment benefits; GDP; Basic PCE; Langer consumer comfort; IMN Chicago PMI
    • October 1: personal income and expenses; PCE deflator; Markit US Manufacturer PMI; consumer sentiment from the University of Michigan; construction expenses; ISM Manufacturing
  • Fed Calendar:
    • September 27: Charles Evans of the Chicago Fed; John Williams of the New York Fed; Governor Lael Brainard
    • September 28: Evans; Fed Chairman Powell appears with Treasury Secretary Janet Yellen, his predecessor, before the Senate Banking Committee; Governor Michelle Bowman; Raphael Bostic of the Atlanta Fed; James Bullard of the Saint-Louis Fed
    • September 29: Patrick Harker of the Philadelphia Fed; Powell; Bostique
    • September 30: House panel on the Fed and Treasury response to the pandemic; Williams; Bostique; Evans; Bullard; Harker
    • October 1: Harker; Loretta Mester of the Cleveland Fed
  • Auction calendar:
    • Sep 27: invoices at 13 and 26 weeks; tickets at 2 and 5 years old
    • Sep 28: tickets for 7 years
    • Sep 30: 4 and 8 week invoices

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