U.S. Government Bonds Extend Selloff
The roaring Treasury bond market has come to a screeching halt.
Investors cashed in their chips out of the U.S. Treasury bond market on Tuesday for a fourth straight session as concerns grew that the price rally that accelerated in May might have run its course.
It marks the longest losing streak for the U.S. government-bond market in two months. The yield on the benchmark 10-year note has risen since hitting about 2.4% on May 29, the lowest level since October.
“It feels like demand has been sated when the yield hit 2.4%,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP, though he said he was surprised by the magnitude of the selling over a short period.
William O’Donnell, head of U.S. government-bond strategy at RBS Securities, said he believes 2.4% represents the bottom, at least in the short term. “The market is deeply overbought.”
In late afternoon trading, the 10-year note was 17/32 lower, yielding 2.595%, according to Tradeweb. When bond yields rise, their prices fall.
Traders said hedge funds and dealers have been sellers of Treasury bonds. Some traders said part of the selling was linked to hedging on new corporate bond sales. Companies and banks tend to sell Treasurys to hedge the risk of higher borrowing costs when they plan to sell new bonds.
In a sign that some investors believe bond yields’ decline has run its course, the latest weekly survey from J.P. Morgan Chase & Co.’s Treasury clients showed on Tuesday that investors turned the most bearish on Treasury bond prices in eight years.
Those who expect bond prices to fall, or shorts, rose to 40% in the week ended Monday, from 35%, while those who expect bond prices to rise, or longs, fell to 11% from 17%. That resulted in a net short of 29%, the most since May 2006.
The yield’s rise represents just a mild setback for the bond market this year. The 10-year yield has tumbled from about 3% at the start of the year.
Concerns about an uneven pace of the global economic growth and reassurance from major central banks to keep interest rates low longer, have boosted the allure of U.S. government bonds. The $12 trillion debt market is the world’s most liquid bond market, drawing buyers for safety.
Sentiment brightened somewhat as data this week have showed encouraging signs. On Tuesday, factory orders for April posted a 0.7% gain, beating economists’ forecasts. That followed Monday’s releases showing a gauge of China’s manufacturing sector hit a five-month high, while a similar indicator on the U.S. manufacturing sector strengthened last month.
Mr. O’Donnell said he wouldn’t be surprised to see the yield rise to 2.80% in a few months.
But some analysts and traders cautioned it was premature to conclude that the decline in yields is over.
“I don’t think yields have bottomed,” said Robert Sinche, global strategist at Pierpont Securities. “They likely go higher, but with global uncertainties…there are risks that an event could push [the 10-year yield] below 2.40%.”
Analysts said bond investors would continue to zero in on economic releases for clues on yields.
On Wednesday, the May private-sector employment report is due, along with a gauge of the service industry. The key U.S. data point this week is Friday’s nonfarm jobs report, which is closely watched by the Federal Reserve.
Source: wsj
