Treasuries Rally After Beijing Cases Renew Second Wave Fears

(Bloomberg) -- Treasuries advanced after a Beijing coronavirus breakout intensified concerns about a second wave of infections and the rising number of cases in the U.S. threatened to set back states’ efforts to reopen.

Traders raced for the longer end of the curve, sending the yield on 30-year bonds down as much as seven basis points, and those on 10-year maturities by five basis points. While demand for the world’s safest assets calmed down during U.S. trading hours, long-term securities continued to outperform their shorter-dated peers.

Traded volumes in Treasury futures were close to double the average for the first three hours of the day’s session in Asia, but U.S. trading was much more subdued. Though both long-term rates have been on a downward trajectory for much of this year, they were still off their March lows. In eurodollar options, demand continued for hedges covering negative-rate scenarios, with large flow emerging across September 2020 options.

“The markets were overly optimistic about the challenges the global economy is going to face from even minor waves of coronavirus, and just because everything reopens doesn’t mean things go back to normal,” said Thomas Graff, a portfolio manager at Brown Advisory in Baltimore, which manages $6.5 billion in fixed-income assets. “Evidence of a second wave can touch off several impacts that almost always is going to turn into demand for dollars and Treasuries.”

Beijing shut its largest fruit and vegetable supply center after dozens of people associated with the market tested positive for the virus. Meanwhile, U.S. cases have surged in Texas, Florida, Arizona and North Carolina, a trend that threatens to pause reopenings, and one policy maker -- Esther George, president of the Federal Reserve Bank of Kansas City -- said she expects slow, steady progress as the economy reopens. Worries about a second wave sent stocks tumbling around the world, with the S&P 500 Index dropping as much as 2.5% before paring the decline.

Meanwhile, the dollar headed for a third straight day of gains, its longest winning streak in more than a month, according to the Bloomberg Dollar Spot Index.

It’s No Blip

There are signs the rally in Treasuries will continue. The latest data from the Commodity Futures Trading Commission shows that hedge funds and other large speculators have flipped to long U.S. 10-year futures for the first time since 2017. That puts the prospect of yields falling to 0% back in focus.

Europe’s less severe second-wave concerns were reflected in the more muted moves of its debt markets. Yields on government bonds fell across the board, led by peripheral nations such as Greece and Spain. The continent has so far succeeded in loosening its lockdown without a spike in cases.

In the U.S., “the rising numbers of COVID-19 cases across the South and West are a good reminder that nothing about the medium-term outlook and uncertainty around the pandemic has been resolved, even if the employment situation and other incoming data have increased our confidence about a near-term rebound in economic activity,” said Barclays chief U.S. economist Michael Gapen.

Monday’s flattening move in Treasuries may have been supported by some funds bailing out of popular steepener trades, where investors bet that long-end yields will climb faster. Wall Street banks including Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. have all recommended some form of a steepener strategy.

Read: Morgan Stanley Rejigs Treasury Trades, Sticks With Steepeners

©2020 Bloomberg L.P.