Treasuries Benefit From Risk-Aversion, Fed Outlook and Flows
(Bloomberg) -- Treasury yields fell Monday led by the 30-year bond’s as negative virus developments and stock-market declines gave a boost to bond demand that was already benefiting from a bullish supply-demand backdrop.
Also, with this week’s Federal Reserve meeting expected to accelerate the wind-down of asset purchases, a precursor to raising rates, long-maturity Treasuries are benefiting from the possible economic fallout, further flattening the yield curve.
The 30-year bond’s yield declined as much as seven basis points to 1.806%, while yields on notes maturing within five years were lower by less than five basis points.
“While the front-end of the market will remain bearishly disposed and tied to Fed expectations for 2022-2023 in terms of bringing forward rate-hikes, 10s and 30s are poised to continue rallying on an outright basis once the curtain falls on the Fed’s final act of 2021,” wrote analysts at BMO Capital Markets.
Sentiment for long-dated paper also was boosted by the dearth of note and bond auctions until next week’s 20-year bond sale. Meanwhile, the Fed’s purchases continue, and targeted long-maturity sectors Monday.
With risk appetite ebbing into year-end, the Fed’s purchases appear to be “having an outsized impact on long end rates,” Citi strategist Raghav Datla said in a Dec. 10 note.
Long-dated Treasury yields turned lower toward the end of last week and extended their decline after a hot November inflation reading reinforced sentiment that Fed officials will signal that a faster pace of monetary tightening is in store in 2022. The Fed is seen ending bond purchases by March and beginning rate hikes toward the middle of next year.
The recent drop in long-dated Treasury yields also reflected bearishly positioned investors being forced to exit the market, with the proximity of year-end contributing to less appetite for opening new trades.
“Tapered purchases and renewed risk appetite might diminish the magnitude of rallies in the New Year,” Datla wrote.
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