Bond-Market Pain Reaches 30-Year Treasuries as Yield Breaches 3%

  • Selloff resumes after support from month-end buyers fades
  • Large block trade, corporate bond issuance add pressure
David Stockman, former director of the U.S. Office of Management and Budget, discusses U.S.debt and the bond market.

This was supposed to be the quiet day for the bond market in an otherwise wild week. It turned out there was more pain in store.

The benchmark 10-year U.S. yield hurtled toward 2.8 percent, setting fresh highs since 2014, and the 30-year yield broke through 3 percent for the first time in eight months. Treasuries found little support throughout the trading session -- no more month-end buyers like pensions and index funds to step in, and little sign of demand from Asian buyers. Most traders were content to let the bear-market narrative run its course after the worst January for the world’s biggest bond market since 2009.

“There was a ton of event risk” Wednesday, said Mike Schumacher, head of rates strategy at Wells Fargo Securities. “I thought it was potentially the most market-moving day for rates in a very long time, and yet it turned out to be pretty benign. Maybe it was just a day late.”

Investors already digested the latest reading of the Federal Reserve’s preferred inflation gauge on Monday and Donald Trump’s State of the Union address on Tuesday. On Wednesday, the Treasury announced increased coupon auction sizes for the first time since 2009 and Janet Yellen ended her final Federal Open Market Committee meeting as Fed chair.

Thursday, by comparison, looked unlikely to shake the market. Yet the latest leg of the rout suggests traders had a chance to digest all that information, and they decided the path of least resistance was to sell.

A large block trade in 10-year Treasury futures sent the 30-year yield through the 3 percent level. Pressure continued to mount as a number of investment-grade corporate bond deals came to market. Such offerings tend to spur selling in Treasuries as investors raise cash to buy the new securities.

The yield curve from 5 to 30 years bear steepened after touching 40 basis points, its flattest level in over a decade. A year ago, the spread was 120 basis points. The move reversed the post-FOMC flattening, with traders potentially taking profits, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

BMO Capital Markets strategists said in a morning note that breaching the 40-basis-point level in the yield curve puts 35 basis points into view, “and a break there has little below it to inversion,” which they predict will happen sometime this year.

Yet with undertones of a bear market in the making, no one wants to catch the falling knife that is the $14.5 trillion Treasuries market.

“It’s more of a momentum trade,” Rajappa said. “People are taking cash, putting it in the front-end and just waiting to see how far this goes.”

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