Investors Eye Treasury Futures for Gauge of 1% 10-Year Breach

(Bloomberg) -- With U.S. cash-bond markets closed for a holiday on Wednesday, all eyes were on Treasuries futures, where implied yields on U.S. 10-year notes got within a whisper of breaching the key psychological 1% level earlier in the day.

The U.S. ultra 10-year Treasury note future -- which aligns with the May 2030 cash security -- declined in Asia trading amid a sharp selloff in global bonds, which saw Australian 10-year yields touch 1%, the highest since September. The U.S. ultra 10-year contract dropped as low as 155-12+, which implies around a 0.99% 10-year Treasury yield. A drop through 155-12 equates to an approximate breach of that 1% level. It was at 155-27+ in late morning New York trading.

Traders will be watching whether U.S. stocks can extend this week’s gains Wednesday, potentially spurring a test of that key level in bond futures and prompting 10-year yields to reopen above 1% following the U.S. Veterans’ Day holiday. The cash yield touched 0.973% Monday, its highest since March, which was also the last time it exceeded 1%.

See here for more on the re-emerging reflation trade.

Now investors are monitoring a possible break of that level as an event that could bring in more selling and potentially drive yields even higher. An unruly selloff could even get the attention of the Federal Reserve, which has been buying about $80 billion of Treasuries a month to ensure smooth market function and keep financial conditions easy.

Thursday may also bring more upward pressure on yields, with a record $27 billion 30-year Treasury bond auction on the calendar.

There will be added focus on the indirect bids at the sale as a measure of international participation, after dealers were left with big chunks of this week’s historically large 3- and 10-year auctions.

See here for more on this week’s auctions.

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