Bond Dip Buyers Emerge After Treasury Selloff Hits Record Speed

With Treasuries engulfed in their first bear market since 1981, dip buyers are finally starting to nibble.

A bid for bonds pressured benchmark 10-year Treasury yields lower on Monday, fresh off the maturity’s seventh-straight week of rising yields amid building inflation expectations. Long-dated Treasuries absorbed the bulk of the demand, flattening the spread between 2- and 10-year yields after the curve hit its steepest level since 2015 on Friday.

While dip buyers had been absent during the bond market’s months-long rout -- fueled by a brightening economic outlook with the U.S. vaccine rollout underway -- traders say opportunists saw potential for a short-term reversal after the speed of the latest leg down triggered some technical signals, according to Miller Tabak + Co.’s Matt Maley.

On Friday, the $14.7 billion iShares 20+ Year Treasury Bond ETF (ticker TLT)’s weekly relative strength index -- which measures the magnitude and persistence of price movement -- clocked in at the most oversold level on record, while the same measure on 10-year Treasury yields registered as the most overbought since 1994.

“There isn’t any big fundamental news to account for the move,” Maley said. “Instead, I think it’s merely that bonds have become very oversold on a short-term basis.”

Bond Dip Buyers Emerge After Treasury Selloff Hits Record Speed

Rates on 30-year bonds dropped by about 5 basis points on Monday, while 10-year yields fell roughly 4 basis points. In addition to overstretched technicals, the ouster of Turkey’s central bank governor may have reignited a haven bid for bonds, though the fallout was largely contained to Turkish assets.

Federal Reserve Chairman Jerome Powell is also scheduled to appear before Congress alongside Treasury Secretary Janet Yellen on Tuesday, in another potentially market-moving event.

The slide in yields slowed the equity market’s rotation trade, with financials and utilities among Monday’s biggest losers. Rising yields and breakeven inflation expectations have powered cyclical stocks -- those with earnings viewed as being more tied to economic swings -- higher in 2021, but that momentum is due for a breather, according to YCG Investments’ Elliot Savage.

“The way these macro narratives work is that they go to extremes,” said Savage, a portfolio manager at the firm. “When everyone is talking about inflation, inflation, inflation, it’s probably a good idea to fade that and rebalance into things that are contrary to that narrative so I think that’s probably what’s going on.”

To be sure, plenty of risks lurk for traders fresh off buying the dip. Chief among them is a hefty slate of Treasury auctions, which includes a $62 billion sale of seven-year notes -- the same maturity that sent a wave of panic through risk assets last month after recording record-low demand.

“This week will be a test I think for the market because we’ll revisit the seven-year auction,” said Quincy Krosby, chief market strategist at Prudential Financial. “But given that this is the end of March, given that this is the end of the quarter, you may see pension funds, particularly pension funds that re-balance their portfolios, perhaps take profit from their equity holdings and begin a bit of buying in Treasuries.”

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