Treasury Bulls’ Grip on Market Tightens, Spoiling Sell-Off Calls

(Bloomberg) -- Treasury bond bulls are ascendant yet again, amid a burst of concern over the global growth outlook fueled by a viral outbreak that’s disrupting travel and business across China.

Benchmark 10-year Treasury yields on Friday dove as low as around 1.67%, a level unseen since early November. Demand for havens surged during American trading hours as cases of the deadly virus were reported in the U.S. and Europe.

In the coming days, investors will get fresh insight from Federal Reserve officials, and a wave of U.S. government-debt supply is on the market’s radar as well. But few see a potential catalyst to completely upend the latest momentum. Treasuries are coming off their biggest weekly rally since October, spoiling predictions that reflation bets would take over in early 2020 and drive yields higher.

“Investors have sort of been waiting for 10-year notes to break 2% and move higher because the economy is doing well, and that’s just not happening,” said Tom di Galoma, managing director of Seaport Global Holdings. “With the coronavirus, there’s so much uncertainty plaguing the marketplace, and with that the possibility of further risk-off moves because we just aren’t sure how bad the problem is.”

The virus-driven flight to safety finally pushed yields out of the roughly quarter-point range they’d been stuck in for months. The 10-year rate, a benchmark for global borrowing, peaked just below 2% in November amid optimism over a U.S.-China trade deal. And on the downside, before Friday it hadn’t been below 1.7% since early December.

In the coming week, swings in yields could be magnified as trading flows may be below average with Chinese markets shut for the Lunar New Year holidays.

Long-Maturity Dominance

Longer-maturity debt dominated this past week, flattening the yield curve and shrinking the extra yield on 10-year notes over 2-year obligations to its slimmest in more than a month. A few weeks ago, the curve was its steepest since 2018 amid easing trade friction.

With the rally, Treasuries are building on last year’s solid performance. The Bloomberg Barclays U.S. Treasury index earned 6.9% in 2019, the most since 2011, and it’s gained 1.2% in 2020 through Jan. 23.

The Fed meeting stands out as the big event on next week’s calendar. Traders have brought forward to late this year the timing for when they see the Fed cutting rates again. A week ago, there was less confidence about a reduction by year-end.

As for economists, most expect the Fed will keep rates on hold this year and next, according to a Bloomberg survey. Central-bank officials in their latest forecasts signaled no change this year.

Alberto Gallo, a London-based money manager at Algebris Investments, expects the Fed to hold steady next week, but he sees more easing ahead.

“There is potential for a transition across central banks towards a structurally more dovish stance, globally,” Gallo said.

What to Watch

• Chinese markets are closed for holidays through Jan. 30
• Wednesday’s Fed decision aside, there’s plenty of economic data in the coming week to keep traders busy, with housing figures among the highlights.
• Here’s the economic calendar:
  • Jan. 27: New home sales; Dallas Fed manufacturing activity
  • Jan. 28: Durable goods/capital goods orders; S&P CoreLogic Case-Shiller home-price index; Conference Board consumer confidence; Richmond Fed manufacturing index
  • Jan. 29: MBA mortgage applications; advance goods trade balance; wholesale/retail inventories; pending home sales
  • Jan. 30: Gross domestic product data; jobless claims; Bloomberg consumer comfort
  • Jan. 31: PCE deflator; MNI Chicago purchasing managers index; University of Michigan sentiment
• Here’s the auction schedule:
  • Jan. 27: $39 billion of 26-week bills; $45 billion of 13-week bills; $40 billion of 2-year notes; $41 billion of 5-year notes
  • Jan. 28: $26 billion of 52-week bills; $20 billion of 2-year floating-rate notes; $32 billion of 7-year notes

--With assistance from Elizabeth Stanton.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

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

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