Photographer: Michael Nagle/Bloomberg

Treasuries Rise; Yields Fall to Lowest Levels of 2017

  • Ten-year yield retraces half of its post-Election Day climb
  • Strategists see potential for momentum to remain overbought

Treasuries rose Tuesday, sending most yields to their lowest levels of 2017, as markets continued to be driven by declining expectations for tax reform as well as geopolitical concerns.

Yields were lower by four to nine basis points as of 3 p.m. in New York, with the 10-year lower by 8.5 basis points at 2.1 percent, below closing levels since Nov. 10. It fell below the 2.177 percent level marking the midpoint of its climb from Nov. 9 to Dec. 15. Drivers included fading confidence in tax reform, North Korean missile tests, Sunday’s first-round French election and a spate of weak U.S. economic data including March housing starts reported on Tuesday.

  • “The unwind of this trade is painful to all funds who sold Treasuries vs buying stocks and now don’t know what to do,” said Michael Franzese, trader at MCAP LLC
  • Yields declined concurrently with U.S. equity benchmarks following Guardian report that U.S. military is considering shooting down North Korean missile tests; UST futures volumes surged as Monday’s highs for June TY contract were exceeded, with nearly 52k contracts traded over 10 minutes at 11:30am EDT
  • Below 2.177%, 10Y may find yield support at 2.1325% (38.2% retracement of its selloff from post-Brexit lows on July 9 to its 2016 high on Dec. 15), then at 2.068% (61.8% retracement of Nov. 9-Dec. 15 selloff)
  • UST yields declined concurrently with U.K. gilt yields during European trading, when the U.K. 10Y yield traded under 1 percent for the first time since October before rebounding with the pound following Prime Minister May’s call for an early general election in June
  • Treasury yields briefly stabilized as gilt yields rebounded, then resumed their declines; U.S. 10Y and 30Y yield spreads vs U.K. counterparts narrowed, with the 10Y spread approaching lowest level since mid-February
  • Gains for Treasuries have pushed various momentum measures to levels strategists called overbought, suggesting that additional yield declines will be hard-won
  • Citigroup’s price momentum studies “are deeply overbought in rates -- a sign in our view that a lot of the post-election shorts have covered these past few months,” strategist William O’Donnell said in note; still “under the right conditions the 2017 bull trend could continue”
  • JPMorgan’s weekly Treasury Client Survey found fewer shorts among active clients (10% versus 30% last week), where longs increased to 30% from 10%, flipping the group back to net long
  • Treasuries advanced despite resurgent corporate bond issuance; five issuers were expected to price $11.2b, led by JPMorgan and Citi $benchmarks
  • TIPS breakevens fell to fresh YTD lows, 5Y breakeven to 1.75%, lowest since Nov. 29, 30Y to 1.99%, lowest since U.S. Election Day Nov. 8; Treasury is slated to auction $16b of 5Y TIPS on Thursday

— With assistance by Edward Bolingbroke

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