Treasuries Fall Led by Bunds, Driving Yields Up From 2017 Lows

Updated on
  • Bond bulls face resistance following month-long rally
  • Selloff led by European rates after lukewarm German auction

Treasuries fell Wednesday, pushing five- to 30-year yields up from their lowest levels this year, amid supply-driven declines for German government bonds and technical indications that the month-long rally is running out of steam.

Yields were higher by two to four basis points at about 2:20 p.m. in New York, with the 10-year higher by almost four basis points at 2.21 percent. Tuesday it touched 2.163 percent, the lowest since November, without a clear catalyst. Fading confidence in tax reform, North Korea missile tests, French election risk and a spate of weak U.S. economic data were all cited, along with declining inflation expectations as measured by break-even rates on inflation-protected Treasuries.

  • Flows Wednesday included two large block sales in 10Y futures, following steep increases in open interest in 5Y and 10Y contracts during Tuesday’s rally
  • Bank of America strategists said U.S. rates market has priced out any chance of tax reform, presenting several “compelling opportunities” to bet against that view
  • 10Y yield has scope to 3% by year-end assuming tax cuts are passed, adding to inflationary pressures on an economy already running near capacity, Daniel Christen of Capital Economics said in note
  • Break-even inflation rates were mixed ahead of Thursday’s $16b 5Y TIPS auction; 5Y and 10Y break-evens were near YTD lows as crude oil slumped, while 30Y breakeven declined to lowest levels since U.S. election
  • Wednesday’s declines indicate strong resistance to lower yields near current levels; besides marking the low end of the range since the initial selloff sparked by Trump’s election victory, Tuesday’s range for the 10Y yield also encompassed the mid-way point of the selloff from Nov. 9 to Dec. 15
  • Investment-grade credit issuance exceeded $10b for second straight day, led by $6.75b Bank of America offering
  • German and U.K. 10-year yields also rebounded from their lowest this year, with the German 10Y rising following cool reception for 30-year auction and hawkish comments by ECB’s Hansson

— With assistance by Edward Bolingbroke

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