Treasury Selloff Lifts Long-Dated Yields for Second Straight Day
U.S. Five-Year Yield Highest Since February 2020 in Bond Selloff
(Bloomberg) -- Treasury yields rose a second day amid increasing conviction that the Federal Reserve will raise rates at least three times beginning in May.
Long-maturity yields rose the most, which traders attributed to a second day of heavy supply of new corporate bonds following a three-week lull at the end of last year. The five-year note’s yield climbed as much as 4 basis points to 1.395%, the highest since Feb. 20, 2020, but ended the day higher by less than a basis point.
Ten and 30-year yields reached session highs as 14 companies lined up investment-grade bond sales totaling more than $20 billion on Tuesday, following an $11 billion haul on Monday, and remained elevated despite a selloff in U.S. technology shares.
“It is more new-issue supply than the market expected,” said Tony Farren, managing director at Mischler Financial Group. While elevated inflation and the Fed’s recent hawkish turn put upward pressure on yields, those factors aren’t news to the market, he said.
The 30-year yield rose as much as 7.7 basis points to 2.10%, the highest since Oct. 25 and exceeding its 200-day moving average for the first time since then. The move appeared to have been aided by a large block trade in Ultra Bond futures.
The yield curve steepened from levels that remain low by historical standards, consistent with expectations for Fed rate increases. The yield gap between two and 10 years widened to more than 90 basis points; between five and 30 years it topped 70 basis points. Both curves reached the steepest levels in more than a month.
Monday’s selloff lifted the 10-year note’s yield by nearly 12 basis points in its worst start to a year since 2009, and the two-year yield topped 0.80% for the first time since March 2020. The rout unleashed a huge outflow from one of the biggest Treasury ETFs, and pushed bond volatility to a relative high versus equity volatility.
That move rippled through government bond markets from Australia to the U.K. as bond trading resumed after a holiday on Monday. Australian 10-year yields jumped as much as 15 basis points to 1.82%, the highest since Nov. 26. Yields on the same U.K. tenor surged as much as 12 basis points to 1.09%, the highest since Nov. 3.
Initially, Tuesday’s selloff was limited to regular Treasuries, while Treasury inflation-protected securities outperformed, causing market-implied inflation expectations to climb.
That reversed after a measure of U.S. manufacturing declined more than forecast, with its prices-paid component slumping to the lowest level in more than a year. Demand for TIPS collapsed, sending their yields higher and slashing inflation expectations. Meanwhile, U.S. job openings declined in November, even as a record quit rate in the private sector underscores the strength in the labor market.
Traders may be shifting their focus to Wednesday’s release of the minutes of the Fed’s December meeting, when it decided to double the pace of tapering asset purchases to pave way for rate hikes. It also released forecasts showing officials on average expect to raise rates three times this year.
Federal Reserve Bank of Minneapolis President Neel Kashkari, the central bank’s most dovish policy maker in recent years, said in an essay posted on the bank’s website that he now supports two rate increases this year to address inflation.
“An accelerated taper, and a quick step towards rate hikes is on the menu,” said Padhraic Garvey, head of global debt and rates strategy at ING Groep NV. “That’s not a ‘next year’ story any more. It’s front-and-center, which helps to concentrate minds. The key for me is whether net buying kicks in again. It might, but will be more difficult if the Fed is intent on hiking, and hiking fast.”
©2022 Bloomberg L.P.