The Treasury market endured one of its worst days in the past year Tuesday as 30-year yields surged to the highest level since 2007.
(Bloomberg) — The Treasury market endured one of its worst days in the past year Tuesday as 30-year yields surged to the highest level since 2007.
The latest sign of US economic resilience unleashed a tide of selling, and traumatized investors opted to steer clear. Yields for most Treasury tenors climbed to new multiyear highs led by the 30-year, which rose as much as 16 basis points to nearly 4.95%. It was about 15 basis points higher on the day in late trading, poised for its biggest move in more than a year.
The selloff gathered pace after an unexpected jump in job openings reinforced speculation that the Federal Reserve isn’t done raising interest rates. And regardless of whether the central bank opts for a 12th rate increase, investors are coming around to the view that the policy rate may remain elevated indefinitely as seen in the surge in long-end yields.
That’s a departure from what has been the consensus — that the cumulative effect of the rate increases would cause an economic slowdown, if not a recession, requiring rate cuts next year. As bond yields rise to reflect the shift, no one is sure where they will come to rest. The 10-year note’s yield topped 4.75% Tuesday, and options activity this week suggests traders are setting hedges for the possibility it will reach 5% — a level few if any Wall Street forecasters have predicted — within weeks.
“The speed of the move has scared all the value buyers,” said Michael Cloherty, head of US rates strategy at UBS Securities LLC. “If you can hold a trade for three months, you’re happy. It’s what happens in the next 72 hours that’s the trouble here.”
The rapid pace of the moves in recent weeks has taken investors and strategists by surprise. Across Wall Street, analysts are rethinking their forecasts for just how high yields can go, with those at Goldman Sachs Group Inc. and JPMorgan Chase & Co. among the latest to set higher targets. Meanwhile, investors that had piled into bonds all year in anticipation of a rally are reeling from a third-quarter loss that wiped out gains for the year.
Tuesday’s lone economic indicator showed that US job openings unexpectedly increased in August. Though it will soon be overtaken by the broader employment data for September that will be released Friday, “investors are nonetheless interpreting this as yet further confirmation that the US economy can withstand higher real borrowing costs,” Ian Lyngen, interest-rate strategist at BMO Capital Markets, said in a note.
Hawkish Tone
With the economy defying downbeat forecasts, swap contracts are putting 40% odds on another quarter-point rate increase at the Fed’s next meeting in November and about 60% odds of a move by year-end.
That prospect was endorsed by Loretta Mester, president of the central bank’s Cleveland branch in comments Tuesday. And Atlanta Fed President Raphael Bostic underscored the hawkish tone, saying the Federal Reserve should hold interest rates at elevated levels “for a long time.”
The upward drift in yields has included those on inflation-adjusted securities, indicating investors are demanding higher risk-free rates of return based on their expectations for how the economy is likely to perform.
The 10-year real yield — or the rate after inflation is taken into account — rose to 2.45% Tuesday, extending a climb from below 2% over the past month. The 30-year real yield increased to 2.50%.
“Real yields on the long end just have further to go — the pace of inflation falling is not satisfactory enough for the market, and the Fed’s framework for getting inflation lower is to slow the economy, and that’s not exactly happening to the market’s satisfaction,” said John Brady, managing director at RJ O’Brien.
In addition to pricing in higher odds of a Fed rate increase this year, traders also have been paring wagers on rate cuts next year.
Forward markets anticipate the Fed’s policy rate will remain above 4% “forever,” UBS’s Cloherty said. Those are “never-going-to-land type levels,” where previously a soft landing for the economy was anticipated.
–With assistance from Rachel Evans and William Selway.
(Updates yield levels.)
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