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Bond Rally Drags 30-Year U.S. Yield to Lowest Level Since July

Bond Rally Drags 30-Year U.S. Yield to Lowest Level Since July

Bonds rallied from Europe to the U.S., with 30-year Treasury yields falling to the lowest since July, a move that was accelerated by traders unwinding their short bets.
 
The 30-year U.S. rate fell as much as 9 basis points to 1.79%, narrowing its gap with 5-year yields to 72 basis points, within less than 1 basis point of the lowest since March 2020. In Europe, similar-maturity German yields sank 11 basis points, while the equivalent British rate slid about 8 basis points. The 10-year Treasury yield slumped as much as 8 basis points to 1.41%, the lowest since Sept. 24, before paring the decline following a tepid auction.

While it’s hard to pinpoint one single fundamental catalyst for the move, traders said a short-squeeze in bearish bets on the bond market contributed to the rally. Speculators were net short about 269,000 10-year Treasury contracts as of Nov. 2, the most since February 2020, according to the latest data from the Commodity Futures Trading Commission. 

Bond Rally Drags 30-Year U.S. Yield to Lowest Level Since July

The rally started overnight after a report that Federal Reserve Governor Lael Brainard, perceived as more dovish than Chair Jerome Powell, was interviewed for the top job at the central bank. It continued in Europe and gathered further momentum in U.S. trading after the producer-price index came in line with expectations. The news that the Chinese military conducted a combat-readiness patrol mission in the direction of Taiwan Straits also caused jitters among some traders. 
 
“Price action suggests the shorts will continue to get squeezed,” said Chris Ahrens, a strategist at Stifel Nicolaus & Co. “The pain trade is not over.”

The rally in long-bonds defied some expectations that the yield would rise as the Fed retreats from its pandemic monetary stimulus. Instead, yields on 10-year Treasuries have slumped since the Nov. 3 Fed meeting, where the central bank announced it will start tapering its bond-buying program. Some investors say the lower long-term yields point to potential risks for global growth, while others dismiss it as largely position-driven, noting that stocks are near their record highs and credit spreads remain tight.

“The price action tells me that something is amiss with the global economy,” said Ray Remy, co-head of fixed income at Daiwa Capital Markets America. Unleashed by last week’s surprise decision by the Bank of England not to raise interest rates, it also suggests that the Fed “has done a great job separating taper from rate hikes,” he said.

The move was mostly driven by the drop in real yields. Rates on 10-year Treasury Inflation-Protected Securities fell to minus 1.22%, matching the record low set in August. 

Among other drivers, the stock gains in recent months provided an incentive for pension funds to rebalance into long-duration bonds. In a Nov. 8 report titled “Tailwinds from Pension De-risking,” strategists at Morgan Stanley estimated that pensions funds, with total assets in excess of $3.5 trillion, could net purchase between $150 billion and $250 billion fixed-income assets in the next 12 months, on course for the biggest flows since the global financial crisis.

“Pension funds provide a meaningful incremental source of demand, concentrated at the long end,” the strategists wrote. “We expect the back end of the curve to see demand on dips, which could flatten the curve more than normal for a rate hike cycle.”

©2021 Bloomberg L.P.