Biggest Bond Rout in Years Whiplashes Bulls Who Had Been Right
Bloomberg – After August’s historic drop, it was starting to seem like Treasury yields could only fall. And then came Thursday, when an enormous surge reminded even well-entrenched bulls that the world’s biggest bond market isn’t a one-way street.
Yields on two-year notes jumped as much as 14 basis points, which would be the largest full-day increase in a decade, before pulling back to 11 points. A popular iShares ETF tracking long bonds sank as much as 2.4%, the biggest intraday rout since the day after the 2016 U.S. presidential election. The selloff was global. For instance, German 30-year rates briefly turned positive after a month under zero.
Optimism about the U.S.-China trade war — spurred by the two nations agreeing to hold face-to-face talks next month — are what initially got markets moving. But other catalysts were at play, too.
Treasury yields hit their highs of the day after growth at U.S. service businesses beat estimates. A deluge of investment-grade corporate bonds sold by the likes of Apple Inc. and Walt Disney Co. flooded the market with supply, which tends to drive up yields. And a trio of central banks just refrained from sounding dovish, putting some investors on alert for policy surprises.
“Treasuries are not a one-way trade, even as the trend is for lower yields,” said Scott Buchta, head of fixed income strategy at Brean Capital. “It’s a risk-on related move today given trade-talks are back on. But the backdrop of the high level of corporate issuance is also adding some volatility and putting upside pressure on Treasury yields.”
Thursday’s moves contrast sharply with recent trends. Treasuries enjoyed a huge, yield-suppressing rally in August. U.S. debt returned 3.4%, the biggest monthly return since the depths of the 2008 financial crisis, according to a Bloomberg Barclays index. The iShares long-bond ETF, often called TLT, surged 11% for the biggest monthly gain since September 2011. The rate on 30-year Treasuries sank to a record low of 1.90% on Aug. 28.
With a rally in Treasuries pushing the average investment-grade bond yield below 3%, companies are getting in while the getting is good. U.S. investment-grade sales through Wednesday amounted to $54 billion. In Europe, BT Group Plc, Continental AG and Snam SpA joined the barrage of new offering on Thursday, fanning what may be the busiest week for corporate issuance since March 2018.
While most expect the European Central Bank and Federal Reserve to add more accommodation this month, investors were disappointed by the less-than-dovish messages just sent by central banks in Sweden, Canada and Australia. And resistance is growing among European policy makers to ECB President Mario Draghi’s bid to reactivate bond purchases.
German 30-year bund yields rose 14 basis points, ending the day at minus 0.08%. That rout “is a message to the ECB countries who do not want to do quantitative easing,” said Andrew Brenner, head of international fixed income at NatAlliance Securities in New York. If they don’t do QE, “it’s going to get ugly.”
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Investors might want to be skeptical that yield increases will continue. There’s a double whammy of news Friday: the monthly U.S. jobs report comes out and Fed Chairman Jerome Powell speaks about monetary policy, his last comments before the quiet period leading up to policy makers’ Sept. 18 decision.
Rates futures traders are pricing in another quarter-point reduction at that meeting, and a total of about 60 basis points of easing by year-end.
“I don’t see much risk of Treasury yields rising substantially from here,” said Thomas Urano, portfolio manager at Sage Advisory Services. “The reality is the major central banks are making capital readily available around the globe. The trade war is also undeniably causing a significant global slowdown, so yields will remain biased downward.”