Bond Bulls Spy an Opportunity Amid ‘Litany of Risks’ to Growth

(Bloomberg) -- No matter what happens this weekend with Brexit, Treasury bulls are undeterred as they look to a host of other risks that still plague the global economy.

Ten-year Treasury yields closed out the week near a one-month high, buoyed in part by the Brexit accord that the U.K. and the European Union hammered out after a three-year saga. But the prospect of a no-deal Brexit was just one of the building blocks to the argument in favor of bonds.

A “litany of risks” remains, meaning a further increase in yields would be a buying opportunity, according to NatWest Markets. For one thing, surprisingly weak U.S. retail sales figures this week followed signs of weakness in manufacturing and services. And the trade war is hardly over, despite the “phase one” deal between the U.S. and China, whose economy just logged its slowest growth since the 1990s.

“You’re still facing a lot of the same concerns going forward,” said John Briggs, a rates strategist at NatWest. “In the near-term, trade remains the biggest risk.”

Yields on 10-year Treasuries rose 22 basis points in the past two weeks, to 1.75%. That still leaves them about 100 basis points lower than at the start of the year. Last month, the rate touched 1.43%, a three-year low.

Briggs is looking to next week’s Markit reports on U.S. services and manufacturing as an early signal going into the next round of Institute for Supply Management data expected in November. Treasuries rallied in early October and the yield curve steepened after the ISM manufacturing gauge sank to a 10-year low, leading traders to bet on more aggressive Federal Reserve easing.

Traders are now almost certain that the central bank will deliver its third straight rate cut this month, after Fed Vice Chairman Richard Clarida on Friday said policy makers will “act as appropriate” to sustain the U.S. expansion.

However, the biggest near-term threat to growth remains the risk of a souring in U.S.-China trade negotiations, according to Briggs. This month’s partial deal leaves in place, at least for now, the threat of more U.S. tariffs to come in December.

Briggs sees potential for yields to rise should the U.K. Parliament approve the Brexit agreement. But he’s targeting a 1.925% yield on the U.S. 10-year note -- where he said multiple trend lines converge -- as an attractive entry point.

Any Brexit resolution would be unlikely to alter the Fed’s policy path or brighten the “dimmer global outlook,” said Ian Lyngen at BMO Capital Markets.

“The fact of the matter is you have the two largest, most relevant superpowers –- the U.S. and China –- still locked in negotiations which seem to have no near-term resolution in sight.” said Lyngen, BMO’s head of rates strategy. “I would characterize 2% as a buying opportunity at this point.”

What to Watch

• In addition to Brexit developments and U.S. data, traders will look to the Oct. 24 policy decision by the European Central Bank. It’ll be President Mario Draghi’s last rate-decision news conference before he exits at the end of the month. No policy change is expected.
• Here’s the calendar for U.S. economic data:
  • Oct. 22: Richmond Fed manufacturing index; existing home sales
  • Oct. 23: MBA mortgage applications; FHFA house price index
  • Oct. 24: Durable goods orders; initial jobless claims; Bloomberg consumer comfort index; Markit manufacturing and services PMI; new home sales; Kansas City Fed manufacturing index
  • Oct. 25: University of Michigan sentiment index
• No Fed speakers as the central bank’s blackout period begins
• Here’s the Treasury auction schedule:
  • Oct. 21: $45 billion of 13-week bills; $42 billion of 26-week bills
  • Oct. 22: $40 billion of 2-year notes
  • Oct. 23: $20 billion of 2-year floating-rate notes; $41 billion of 5-year notes
  • Oct. 24: 4-, 8-week bills; 7-year notes

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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