US bonds suffer new wave of selling after ‘storm’ sweeps the market
A “storm” swept through the US government bond market on Friday, sending a key measure of long-term borrowing costs to the highest level since last February.
T-bills fell overnight after a large sell-off of long-term bond futures in Asia, people familiar with the matter said. Yields on the 10-year benchmark, a key marker in global asset markets, jumped to 1.63% in the morning on Wall Street, after trading around 1.53% the day before.
Analysts said the scale of the move underscored how nervous the $ 21 billion market has become amid a more robust economic rebound. Treasury bills are the largest and deepest market in the world, which generally protects it from sharp rises and falls in price.
T-bills have been under pressure since the start of the year, investors to anticipate higher inflation and growth in the coming months following another huge injection of fiscal stimulus with the passage of the Biden administration’s latest package.
But the scale of the most recent moves surprised investors, especially after three auctions of new debt this week has gone relatively well compared to an earlier sell-off last month that sparked a strong sale and episodes of hectic trading.
“Just when it was thought that it might be safe in the Treasury market after the auctions went reasonably well, the perfect storm has struck,” said Andrew Brenner, head of international fixed income at National. Alliance Securities.
Momentum also played a role, analysts said, as the aggressive positioning of a handful of sellers earlier on Friday encouraged other investors to pull out of the market.
Priya Misra, global head of rate strategy at TD Securities, said the markets are also “testing” the Federal Reserve, which is expected to meet for its policy meeting next week. President Jay Powell shaken investors earlier this month after choosing not to forcefully push back the recent rise in Treasury yields, which had at times become volatile. Instead, he said the Fed would only be concerned if conditions got “messy”.
“We’re not ‘messy yet’,” Misra said, noting that financial conditions more generally remain extremely loose. “The least resistant path is to raise rates.”
Investors are also worried about the potential for a regulatory change at the end of the month that could hamper the functioning of the Treasury market, Scott Thiel, chief fixed income strategist at BlackRock, calling it a “significant factor” contributing recent volatility.
At the height of financial declines induced by the coronavirus last year, US regulators introduced a temporary rule change that allowed banks to exclude treasury bills and cash reserves when calculating the additional capital they they must hold. The aim, in part, was to encourage banks to intervene more aggressively to stabilize failed markets without worrying about balance sheet constraints.
The exemption is expected to expire at the end of the month, and analysts warn that failure to extend it could exacerbate problems in the treasury market, especially given the size of the supply that is expected to flood the market this. year in order to fund the record-breaking stimulus programs were adopted to support the economic recovery.
“If the rule is not extended, it is certainly possible, if not likely, that illiquidity will return to the Treasury market,” said Kelcie Gerson, interest rate strategist at Morgan Stanley.
“People are really nervous,” added Misra. “We all saw what happened in March . “
Additional reporting by Joshua Oliver in London