Death of the Bond Bull Market Is Upon Us. Bring On More Auctions

(Bloomberg) -- The $14.9 trillion Treasuries market is at an inflection point.

U.S. yields soared last week, busting through levels that seemed out of reach just months ago. The 10-year closed above 3 percent the last five days, a testament to how traders have grown accustomed to that psychological level. Even the resilient long bond gave in. The 30-year yield closed once (but not twice) above 3.22 percent -- the threshold that DoubleLine Capital’s Jeffrey Gundlach said is key for the market. Investors may need a moment to let it all sink in.

And yet the auction calendar waits for no one. The Treasury will sell a combined $99 billion of fixed-rate notes this week, in some of its largest offerings since 2010, with yields at the highest in years. That’s on top of more than $150 billion in likely bill issuance, plus $16 billion of floating-rate securities.

Add a slew of Federal Reserve speakers (capped by the chairman) who may reiterate plans for gradual rate hikes, and it could be a recipe for higher yields. Hedge funds and other speculators are banking on that: Their net short position in 10-year futures as of May 15 was close to a record.

Last week’s leap in yields has just about “put an end to the secular bull market,” Marty Mitchell, an independent strategist and former head government-bond trader at Stifel Nicolaus & Co., said in a note Friday. “With the U.S. deficit expected to explode and as the U.S. debt load builds, it is only a matter of time.”

Maturity Focus

The benchmark 10-year yield ended the week at 3.06 percent, after reaching 3.126 percent, a level unseen since 2011. The 30-year yield, at about 3.2 percent, touched the highest since 2014.

The focus of this week’s auctions will be shorter maturities, which could re-energize a months-long trend toward a flatter yield curve. Traders will scrutinize the latest Fedspeak for signs of concern about the shape of the curve, with chatter emerging among market participants that officials might even slow rate hikes to keep the curve from inverting.

So far, there’s no sign the market anticipates that. In fact, rising oil prices and firming inflation expectations have traders bracing for a more aggressive Fed. They’ve priced in between two and three more rate hikes by year-end. And for 2019, they see almost two quarter-point increases, after barely pricing in one a month ago.

Of course, not everyone is ready to sound the death knell for the bond market. Strategists at Credit Agricole said that while near-term momentum points to higher yields, the impact on other assets will contain the losses.

“We are not at the start of a bear market,” they wrote in a report Friday. “Given the negative impact on emerging markets, U.S. high yield and equities, a further rates sell-off should be self-defeating.”

Squeeze Foretold

Indeed, last week saw a deepening selloff in emerging-market assets. The S&P 500 index also declined.

And speculators could get squeezed out of Treasuries shorts. That’s what BMO Capital Markets strategists are counting on to drive yields lower.

For now, though, it’s hard to argue with the bears. In a stretch without top-tier data or big auctions, Treasuries slumped and the curve from 2 to 10 years steepened the most since February.

This week, Fed Chairman Jerome Powell gets the final say, at an event in Stockholm on Friday.

The timing means U.S. traders will have a few hours to potentially recalibrate their view on the bond market’s direction, before heading off for a long holiday weekend and the unofficial start to summer.

What to Watch This Week

• May 21 is Treasury Secretary Steven Mnuchin’s deadline to develop restrictions on Chinese investments; May 24 is the deadline for U.S. tariffs on Chinese goods to take effect
• On May 23, the Fed will release minutes of the May FOMC meeting; meanwhile, policy makers remain on the speaking circuit
  • May 21: Atlanta Fed’s Raphael Bostic speaks to economics club; Philadelphia Fed’s Patrick Harker speaks in New York; Minneapolis Fed’s Neel Kashkari speaks in Michigan
  • May 23: Kashkari speaks in North Dakota
  • May 24: New York Fed’s William Dudley speaks in London; Bostic and Harker speak in Dallas
  • May 25: Powell speaks at a conference in Stockholm; Dallas Fed’s Robert Kaplan, Chicago Fed’s Charles Evans and Bostic speak in Dallas
• Another somewhat quiet week for economic data
  • May 21: Chicago Fed national activity index
  • May 22: Richmond Fed manufacturing index
  • May 23: MBA mortgage applications; Markit U.S. PMIs; new home sales
  • May 24: Jobless claims; house price purchase index; existing home sales; Kansas City Fed manufacturing activity
  • May 25: Durable and capital goods orders; University of Michigan survey data
• Treasury supply back in focus
  • May 21: $48 billion of three-month bills and $42 billion of six-month bills
  • May 22: Four week bills; $33 billion of two-year notes (largest since 2013)
  • May 23: $26 billion of 52-week bills; $16 billion of two-year floating-rate notes; $36 billion of five-year notes (largest since 2010)
  • May 24: $30 billion of seven-year notes (largest since 2010)

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

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

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