Treasuries Rout Accelerates as Quants Add to Selling Pressure
(Bloomberg) -- Treasuries tumbled anew, lifting 30-year yields the most in almost two months, as corporate hedging and trend-following quant funds added fuel to the selloff that’s driven global debt to its worst annual start in years.
Rates climbed across notes and bonds, with the long-end rising most and the curve steepening sharply, fueled by block sales in Treasury futures and possible mortgage-related hedging. Before buying interest emerged to pull yields back down, the 30-year yield jumped by 11 basis points at one point, to 2.29%, while the 10-year rate climbed as much as 9 basis points to 1.43%, both roughly one-year highs. Rates in Europe jumped too.
Investors are still factoring in the prospect of trillions of dollars of additional U.S. pandemic relief, which is setting the stage for a shift away from historically low Treasury yields and energizing the global economic reflation trade, driving up commodities prices and inflation expectations.
As traders price in the potential for a quicker growth rebound, they’re also looking to the day when the Federal Reserve may pare back its massive bond-buying program and raise rates. Interest-rate swap markets continue to price the first quarter-point hike for around mid-2023, having moved that forward from the early-2024.
“The market is nervous about additional stimulus, worried about the risks of higher inflation, and concerned about QE tapering,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities. “The selloff is likely being exacerbated by convexity hedging and positioning stop-outs.”
Corporate deal-hedging amid a large bond issuance slate also added momentum to the selloff, which was concentrated in the long end. The spread between 5- and 30-year yields hit about 167 basis points, the widest since August 2014. Futures stabilized near session lows as dip buyers emerged.
The decline in Treasuries dragged U.K. bonds lower. Yields on the 30-year tenor reached 1.45%, their highest in about a year, before dipping. Bonds sold off across Europe, with yields on 10-year German bunds rising.
Amid the widespread slump in bonds, the benchmark Treasury 10-year yield’s rolling 30-day correlation with Hedge Fund Research Inc.’s Macro/CTA Index has strengthened, signaling that funds following price momentum are actively building short positions in Treasuries.
Global bond markets are suffering this year, with volatility gauges climbing to multi-month highs. That’s prompted fears over a potential tantrum in havens such as Treasuries and German bonds. While Fed Chairman Jerome Powell this week called the run-up in bond yields “a statement of confidence” in the economic outlook, the move raises pressure on central banks to keep financing conditions easy. The risk is that quant funds act as a further catalyst.
A JPMorgan Chase & Co. model that follows a trend-following strategy backs the case that those funds -- also known as commodity trading advisors -- have been exacerbating the slide in global debt markets.
The model turned short 10-year German bunds on Feb. 12 and Treasuries on Feb. 16, and is now the most bearish on both in at least two years, JPMorgan strategists led by Nikolaos Panigirtzoglou in London wrote in a research note published Tuesday.
“This suggests that CTAs have served to amplify the bond market sell-off in recent weeks,” they said.
The last time the link between Treasury yields and the Macro/CTA Index was this strong was in March. Back then, yields plunged as the coronavirus spread globally, prompting trend-following funds to to quickly add long exposure to bonds.
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