Even Janet Yellen is saying long-term government debt is overpriced.
The Federal Reserve Chair said Wednesday that yields on Treasury bonds are too low and could jump when the central bank raises borrowing costs. Yields on 30-year U.S. government debt reached their highest level in five months, while the sovereign-debt rout in Europe continued.
Yellen’s comments come in the midst of a several-day tumble in sovereign bond markets worldwide, triggered in part by bond titans such as Jeff Gundlach and Bill Gross questioning whether the rally was overheated. Speaking at a conference in Washington, Yellen said she sees signs of “reach for yield.”
“There’s been a lot of people caught offsides here, and her comments didn’t help,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi Securities UFJ Securities USA Inc. “That was something that no one expected.”
Thirty-year bond yields rose eight basis points, or 0.08 percentage point, to 2.99 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The 2.5 percent securities maturing in February 2045 dropped 1 1/2, or $15 per $1,000 face amount, to 90 9/32. Its yield touched the highest level since Dec. 2.
U.S. benchmark 10-year yields added six basis points to 2.25 percent, after climbing to their highest level since Dec. 26.
The global rout has helped push Bank of America Merrill Lynch’s MOVE Index, a measure of expected Treasury-market volatility, to its highest level since March. The index, which is derived from over-the-counter options on Treasuries maturing in two to 30 years, rose to 87.66 on Tuesday.
Fed officials have expressed frustration with long-term debt yields that aren’t climbing as the economy recovers. Until recently, Treasury prices were supported by a global government-debt rally on the European Central Bank’s bond-buying program, since stronger yields made U.S. debt more attractive relative to international peers.
But that all changed in the past two weeks. European government bonds have fallen sharply from historic lows, in a drop that erased $430 billion of value from the global bond market. On Wednesday, the yields on 10-year German bunds rose to their highest level this year.
“There’s a greater macro story here,” said Edward Acton, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed.
He said there may be more pain to come, driven by an “unwind of all these very crowded trades that were driven by the monetary divergence between the Fed and the ECB,” which “led to some seriously complacent trades.”
RBS late Tuesday made its first long-term bearish call since June 2012, he said. The bank is forecasting the 30-year yield will reach 3.5 percent in the next six to 12 months.
“This is endemic to the new world we live in,” said Ira Jersey, an interest-rate strategist with Credit Suisse Group AG. “You’re going to continue to see these big moves with not a lot of liquidity.”
The selloff comes before a government employment report, a key indicator for Fed policy. The Labor Department’s nonfarm payrolls report on May 8 is forecast to show that the U.S. added 230,000 jobs in April, with the unemployment rate dropping to 5.4 percent, the lowest in seven years.
On Wednesday, the ADP Research Institute reported the private sector created 169,000 jobs last month, compared with a forecast of 200,000 in a Bloomberg News forecast. The ADP report is seen as a preview of the government report.