Analysis: The pain is not over for the US bond market, but some see yields approaching their highs


An eagle tops the facade of the Federal Reserve Building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

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NEW YORK, May 10 (Reuters) – Interest rate jitters continue to hammer the U.S. bond market, but some investors are beginning to speculate that a possible easing in price pressure as well as support from buyers seeking may soon cap – or at least pause – on rising yields.

US Treasuries had their worst start to the year on record and selling off parts of the curve continued last week after the US Federal Reserve raised its overnight interest rate benchmark by 50 basis points and announced that it would start reducing its balance sheet next month. to counter uncontrollable inflation.

Yet for some investors, most of the weakness in bond markets due to inflation has been priced in and, while there is still room for upside, yields may soon start to fall, as financial conditions are tightening following Fed actions.

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“We’re probably nearing the peak in terms of yields,” said John Madziyire, senior portfolio manager and head of US Treasuries and inflation in Vanguard’s Fixed Income group.

“Yields may still rise depending on the volatility being so high, but we’re probably getting closer to a point where we’re pricing in the highs in yields and buyers will start to be more attracted to buying at those levels. ” he said.

Yields on 10-year US government bonds – a benchmark for mortgage rates and other financial instruments – hit a new high of 3.2% on Monday, a level last seen in November 2018. it exceeds 3.26%, it will pierce these highs of 2018 and be at the level of 2011.

Brian Reynolds, chief market strategist at Reynolds Strategy, called 2018 and 2011 “two very emotional events in the history of the bond market”, with 2018 marking investors “worried that the Fed will tighten to infinity” while that 2011 was the year the United States lost its triple A rating.

Yields had already exceeded expectations. A Reuters poll from March 29 to April 5 showed fixed income experts predicted the 10-year bond would rise to 2.60% in one year. Read more

After hitting 3.2% on Monday, however, yields fell back to around 3% in a flight to safety as stocks fell on concerns about rising interest rates and an economic slowdown. in China after a recent increase in coronavirus cases.

“The momentum of the push up in interest rates seems to be slowing down a bit,” said Mike Vogelzang, chief investment officer at CAPTRUST, also pointing to relatively stable yields on two-year U.S. government bonds, prices having apparently reflected the Fed’s forecasts. rate hikes this year.

Two-year yields, which are particularly sensitive to changes in monetary policy, have fallen slightly since the Fed raised rates last week, and the yield curve between two-year and 10-year bonds has steepened. is sharply accentuated, going from 18.9 basis points before the Fed hike to 44 basis points on Monday.

This part of the curve reversed at the end of March and then in April, sending a warning signal to investors that a recession could follow. Read more

“The curve was pretty flat a month ago and it’s steepened now…generally a steeper curve is healthy,” said Eric Stein, co-head of Global Fixed Income and chief investment officer at Morgan Stanley Investment Management. .

“We’re starting to hit the conditions in place for yields to stop continuing to rise,” Stein said, pointing to tighter financial conditions and lower inflation expectations as measured by hedged Treasury securities. inflation. Read more

Breakeven inflation rates, indicating market expectations for future inflation, fell. The 10-year break-even inflation rate – a gauge of future inflation – fell to 2.79% on Monday, falling further from 3.14% hit last month, the highest since at least September 2004 .

Fed Chairman Jerome Powell said last week that policymakers were ready to approve rate hikes of half a percentage point at upcoming policy meetings in June and July.

For Jimmy Lee, managing director of The Wealth Consulting Group, a wealth management firm, demand for 10-year notes will likely increase if they achieve a 3.5% yield over the next two months.

“The pain probably isn’t over yet, but I feel like we’re getting closer,” he said.

“Between now and after these two ups, I think there will be potential buying. I think fund managers are seeing value that they haven’t seen in a long time.”

For CAPTRUST’s Vogelzang, however, there is no indication in the market that an upper limit on yields is about to be reached, and the Fed’s balance sheet liquidation, which is expected to begin next month, could add pressure. additional.

“There are too many outcomes that can happen that could really leave you in a bad place,” he said.

(This story corrects the last sentence to say “many” instead of “may.”)

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Reporting by Davide Barbuscia in New York Editing by Megan Davies and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.


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