Biggest Worry About U.S. Yield Climb May Be Lack of Trigger

(Bloomberg) -- As long as interest rates are climbing because the U.S. economy is in good health, then it just amounts to “normalization,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon reassured this month in advising investors to prepare for 4 percent 10-year Treasury yields.

But what if it’s not not entirely clear why yields are rising?

That’s the query posed by Torsten Slok at Deutsche Bank AG after sudden swings in 10-year notes last week. By the end of the day Thursday, yields had surged 16 basis points for the week, without any obvious trigger -- such as a weak government-debt auction or a worryingly high inflation reading, according to Slok. Then Friday, yields tumbled the most in six weeks.

“Nobody understands what sent 10s on a huge roller-coaster ride,” Slok, the bank’s chief international economist, wrote in a note to clients sent May 19. (He found unconvincing the theory that remarks about European monetary-policy plans by the French central bank chief had fed through to Treasuries.) “If the market doesn’t have a narrative, then it means that the market doesn’t know what the implications are.”

Underlying the mid-week advance in yields could be “simmering fears,” Slok said. Among them: a widening U.S. fiscal deficit, diminished foreign-investor demand for Treasuries on higher hedging costs and concerns that American growth is exceeding its speed limit -- leading to faster inflation. It all escalates the importance of monitoring Treasuries.

“In most of my client conversations investors agree that long rates gapping higher is the biggest risk to this expansion,” Slok said. Ten-year yields hit the highest since 2011 Friday, at 3.1261 percent.

To contact the reporter on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Andreea Papuc

©2018 Bloomberg L.P.