For the $25 trillion Treasury market, it was a three-pronged attack. Bond supply jumped just as Fitch Ratings stripped the US of its AAA halo. Days earlier, the Bank of Japan stoked speculation that a new era of capital repatriation may be nigh.
(Bloomberg) — For the $25 trillion Treasury market, it was a three-pronged attack. Bond supply jumped just as Fitch Ratings stripped the US of its AAA halo. Days earlier, the Bank of Japan stoked speculation that a new era of capital repatriation may be nigh.
Now, Wall Street can agree on one thing: The ensuing Treasury selloff that pushed 10-year and 30-year yields close to multi-year highs last week was overdone.
Among fresh trading calls from investment banks, Goldman Sachs Group Inc. and Morgan Stanley are telling clients to buy 30-year inflation-linked bonds, while JPMorgan Chase & Co. is bullish on five-year Treasuries.
In the latter’s view, the unwinding of crowded long positions — as duration bets neared decade highs — likely fueled the market carnage. And recent developments from Fitch or otherwise yield little new information on economic headwinds like US debt sustainability.
The sanguine tone from strategists comes after last week’s selloff whittled down this year’s return in US government bonds to a mere 0.7%, after a staggering 12% loss in 2022. Inflation-adjusted 30-year yields hit almost 2% — the highest since 2011.
Factors seen behind the jump in long-term rates: An increase in Treasury auctions, the spillover effect from the BoJ’s tweaking of its yield-curve control policy, and Fitch’s downgrade of US debt.
Goldman Sachs, for one, isn’t buying it.
“There are a few commonly cited reasons for the selloff, none of which we find particularly persuasive,” strategists led by Praveen Korapaty wrote in a note late Friday. “We are inclined to fade the recent moves on a tactical basis.”
Korapaty and his colleagues picked apart these arguments one by one:
- Are Japanese investors already selling Treasuries en masse, now that the domestic yields are seen moving higher following the policy tweak? Hardly. The US yield increase last week mostly occurred during the US trading hours, rather than during the Asian time zone when Japanese investors are mostly active.
- Could investors be demanding a higher risk premium for long bonds, given the supply pressure from upcoming auctions? Not so far. In Goldman’s view, the so-called Treasury refunding was only slightly bigger than expected, and the issuance was actually less tilted toward longer maturities.
- Does the credit downgrade actually matter? Not really. The debt dynamics and political dysfunction in Washington that Fitch cited are well known. As such, the ratings move contained “no new information,” Goldman strategists conclude.
Now, investor positions in long-dated debt are less crowded but yields are still near their highest levels of the current cycle. That suggests “it is becoming more compelling to add duration,” JPMorgan strategists including Jay Barry wrote in a note.
–With assistance from Edward Bolingbroke.
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