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Treasury Yields Rebound as Rally Lures Bears From Hibernation

JPMorgan, Morgan Stanley Urge Treasuries Bears to Hold Firm

U.S. Treasury yields climbed Monday -- extending Friday’s rebound from multimonth lows -- after several Wall Street strategists said the rally afforded investors anticipating a hawkish turn by the Federal Reserve an opportunity to set short positions.

The 10-year note’s yield, which traded as low as 1.427% on Friday, rose around five basis points, briefly eclipsing 1.5%. It peaked this year at 1.774% on March 30. Yields across the curve faced upward pressure from a large sale of five-year note futures via a block trade, a busy calendar of corporate issuance and the $24 billion 20-year Treasury bond reopening slated for Tuesday.

Last week’s short squeeze in Treasuries -- which produced the biggest rally of 2021 for the 10-year -- left the market primed for a selloff, several banks warned. JPMorgan Chase & Co. strategists turned bearish on 10-year Treasuries ahead of Wednesday’s Fed decision, saying markets are now pricing in a too shallow rate-hike outlook. Analysts at Morgan Stanley are bracing for a hawkish surprise from the U.S. central bank, and TD Securities called for a “tactical short” in the 10-year.

“Given rich valuations and a benign implied tightening pace, we turn bearish in 10-year Treasuries,” wrote a JPMorgan team including Jay Barry. “The pendulum has swung over the current quarter as Treasuries have moved from extremely cheap to extremely rich.”

Meanwhile, Citigroup strategists on Monday joined the growing chorus citing hawkish risks around this week’s policy meeting, noting that bonds are now set up “more sensitive to a hawkish outcome rather than a dovish one.”

Treasury Yields Rebound as Rally Lures Bears From Hibernation

Bond investors have been abandoning short bets in recent weeks on the expectation that officials will reaffirm that an ultra-loose policy remains appropriate, and that it’s too soon to start even considering tapering bond purchases. Still, the Fed could project an interest-rate liftoff in 2023 amid faster economic growth and inflation, according to economists surveyed by Bloomberg -- something the swap-market is pricing for April that year.

Friday’s low for the 10-year yield matched a key Fibonacci technical support level that stemmed from the rise in yields from last year’s pandemic lows.

Treasury Yields Rebound as Rally Lures Bears From Hibernation

Fed Catalyst

While market expectations for the Fed to hike rates are more hawkish than the central bank’s own guidance, swaps are pricing in less than 100 basis points of tightening over the next four years, according to JPMorgan strategists. That suggests markets see a relatively low pace of normalization, they said.

TD Securities sees the potential for the central bank’s median “dot” for 2023 -- a gauge of its expectations for rates that year -- to move higher, according to a note from strategists including Priya Misra. That would likely surprise the market, which is priced for a dovish Fed, they said, calling for benchmark yields to bounce back to the 1.7% level.

The slump in Treasury yields after last week’s U.S. consumer-price data suggests markets see inflation as transitory, just when a case can be made for its sustainability, Morgan Stanley’s head of U.S. interest-rate strategy Guneet Dhingra wrote in a note Friday.

“Given the shift in the mix of inflation from transitory towards sustainable, the risk of a hawkish tilt within the FOMC has increased, exposing the rates market to a hawkish surprise,” he said.

©2021 Bloomberg L.P.