Bond Rout Reignites as U.S. Stimulus Bets Overshadow Quarter-End

The U.S. economic reopening trade is back in full force, sending 10-year Treasury yields up to 1.77% for the first time since January 2020.

With the Biden administration rolling out plans to accelerate the vaccine campaign and rebuild U.S. infrastructure, investors are doubling down on bets on the U.S. economic recovery. Yields on bonds climbed to fresh highs on Tuesday and the dollar strengthened.

The selloff surprised some market participants, who anticipated a period of grace in bond markets this week. Quarter-end re-balancing flows into bonds from stocks had been expected to boost demand in the short term. So anyone positioned for a wave of buying might feel some pain. Plus, the start of Japan’s new fiscal year on April 1 also had many expecting fresh demand from one of the biggest buyers of Treasuries in the past.

“While there was an expectation that quarter-end rebalancing out of equities and into Treasuries would support Treasuries, we have yet to see that develop,” said Larry Milstein, senior managing director and head of government debt trading at R.W. Pressprich & Co. “The market’s focus has instead been on inflation and massive fiscal stimulus, which is weighing on bonds.”

Yields on five-year Treasuries rose above 0.9%, followed by a block sale in the notes, before touching their highest level in 13 months. Treasury 10-year note futures volumes were running 50% over 20-day average levels from 7 a.m. in London up to the start of the U.S. session.

Bond Rout Reignites as U.S. Stimulus Bets Overshadow Quarter-End

The selloff rippled through European markets with benchmark U.K. bonds climbing as much as seven basis points to 0.85% and their German and Italian peers experiencing similar moves. Risk appetite is surging as investors weigh a stronger-than-expected global recovery, and a pledge that 90% of U.S. adults will be eligible to get a Covid-19 shot by April 19. The U.S. reached a record three-day stretch of 10 million shots over the weekend, according to the Bloomberg Vaccine Tracker.

Asset managers say the boost to sentiment means the Treasury rout has further yet to run. Charles Diebel, who manages about 4.5 billion euros ($5.3 billion) at Mediolanum in Dublin, sees benchmark Treasury yields pushing toward 2% in the second quarter. “It will be volatile but the selling isn’t done yet,” he said.

Those who were already positioned for a wave of Treasuries buying, ahead of Wednesday’s quarter-end, may be feeling the most pain amid position stop-outs. According to Bank of America Corp. strategists, $41 billion of U.S. private pension funds is expected to flow into Treasuries over the quarter, with the bulk of that coming by tomorrow.

The bund selloff may prove limited in the near term given the negative net Euro government bond supply in April and the elevated bond buying by the European Central Bank, said Bank of America strategist Sphia Salim. HSBC Holdings Plc sees bund yields falling to -0.3% by the end of June, according to head of U.K. rates strategy Daniela Russell.

Dollar Outperforms

Meanwhile, currency traders are piling into the dollar, with the greenback outperforming almost all its Group-of-10 peers. Investors ditched havens with the yen among the biggest losers in the cohort, and there’s further bad news on the horizon for the Japanese currency -- sentiment on the dollar against the yen is at its least bearish in more than four years.

“The weaker yen is more a dollar story,” said Andreas Koenig, head of global foreign exchange at Amundi Asset Management. “A wider yield gap is to be expected and the yen weakness could go further.”

Bond Rout Reignites as U.S. Stimulus Bets Overshadow Quarter-End

Bond market volatility has tended to cool off in April in the past. But the Treasury selloff will likely last the week, said John Roe, the London-based head of multi-asset funds at Legal & General Investment Management, who is tactically short on U.S. debt. There’s a realistic chance Friday’s payroll data will show one million jobs added in March, he said.

“We think more investors are positioning for that,” he said. “If you want to see how quickly an economy can rebound, and surprise experts, just look at Australia. That same narrative could play out in the U.S.”

Australia’s 10-year bond yield rose as much as 10 basis points, with losses amplified by concerns ahead of Wednesday’s A$2 billion ($1.5 billion) debt sale, the first of material size in a month.

All this comes just days after the downfall of Bill Hwang’s Archegos Capital Management -- and one of the biggest margin calls in history -- showing the irrepressible optimism of reflation-driven markets.

©2021 Bloomberg L.P.

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