Treasuries’ March Above 3% Faces Challenge From Stock Slump
(Bloomberg) -- The 10-year Treasury yield finally reached 3 percent, a milestone that bond traders were eyeing for months to guide their next moves.
Then that pesky stock market got in the way.
After all the hoopla surrounding 10-year yields touching the highest in four years, they couldn’t sustain their highest levels of the day, ending at 2.9995 percent. That’s in part because of the dive in equities, driven both by losses in technology shares and by Caterpillar Inc. effectively saying its first-quarter profit will be as good as it gets in 2018.
It’s the latest manifestation of the tug-of-war between stocks and bonds that’s already been evident this year. In February, the specter of accelerating wage growth sent U.S. yields to four-year highs just below 3 percent, which played a role in the equities correction that followed. Last month, Treasuries finally rallied through key resistance levels amid turmoil around Facebook Inc. and other tech companies.
So even though hitting 3 percent may point to higher yields in the world’s biggest bond market, it’s a reminder that they may not come as fast as the last few months.
“I tend to think yields are going to keep rising in general, but with the break of 3 percent I still don’t think we are going to be at, say, 3.5 percent right away,” said John Briggs, head of strategy, Americas, at NatWest Markets. A 10-year yield of about 3.2 percent at year-end is more reasonable, he said.
The consensus across Wall Street agrees: Rates are rising, but perhaps not in a hurry. JPMorgan Chase & Co. estimates the 10-year yield will end 2018 at 3.15 percent, the same as the median forecast of 56 analysts surveyed by Bloomberg.
In some ways, the Treasury market still hasn’t tested the true high-water mark of the recent past. That would be 3.0516 percent, the peak from Jan. 2, 2014. For Goldman Sachs Asset Management, 3 percent is just a passing point.
“We’ve consistently been saying we expect 3.5 percent before 2.5 percent,” Sheila Patel, chief executive officer of GSAM’s international division, said in an interview with Bloomberg Television. “If it’s a measured reasonable pace, and if the reasoning is because of growth, it doesn’t mean a debacle.’’
The 10-year yield flitted around 3 percent on Wednesday.
For now, bond traders are dealing with a deluge of new debt. This week alone, the Treasury is issuing a combined $96 billion of two-, five- and seven-year notes, the largest slate of fixed-rate coupon sales since 2014. In its $32 billion two-year sale, the notes drew a yield of 2.498 percent, the highest since 2008.
The market is also assessing how quickly the Fed will raise rates. Policy makers’ most recent forecasts are for two additional rate increases in 2018. Traders are pricing in even more than that.
“Other parts of the yield curve have broken out well before this move in 10-year yields,” Briggs said. “The Fed is more confident that it will keep raising rates and that inflation will move to target. The conversations are now that maybe the Fed doesn’t do three but four hikes this year, and maybe three next year.”
Fed officials have largely been sanguine about the stock markets, looking through the pickup in volatility relative to the past couple of years.
But it doesn’t necessarily look like Treasuries will take equity losses in stride, too. So it’s no foregone conclusion that the 10-year yield will rip through 3 percent.
©2018 Bloomberg L.P.