Bond Bulls Find Vindication as Stocks Rout Sinks Risk Appetite

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Citigroup's Wieting Says It's Going to Stay Volatile for a While

Battered bond bulls found their hopes salvaged Monday as crumbling equity markets drove investors to the safety of government debt.

Treasuries switched from a rout to a full-fledged rally in a matter of hours, pulling 10-year yields down from a four-year high. Measures of inflation expectations also fell, as did bets on Federal Reserve rate hikes in 2018, as traders bet sinking stocks could undermine consumer confidence and give policy makers pause.

The benchmark 10-year yield tumbled 0.13 percentage point to 2.71 percent, reversing its rise Monday to 2.88 percent, the highest since January 2014. The S&P 500 Index plummeted about 4 percent, erasing its gains for 2018.

“If the declines continue and actually spur concern about the path of Federal Reserve tightening, then it means even those with cash will get sidelined and get into Treasuries,” said Aaron Kohli, a strategist at BMO Capital Markets. “People say a 3 or 5 percent correction in stocks isn’t a big deal, but the problem is when it starts to happen it doesn’t feel like it will stop there.”

Investors may even lose confidence that the Fed will hike in March if stocks continue to slide, he said. That prospect has been seen as a near certainty.

Evidence of economic strength, including a tightening U.S. labor market and an improving outlook for wage gains, drove yields higher to start the year. Adding to that, the government announced the first increase in coupon-bearing debt sales since 2009.

Even in the face of the bond selloff, some investors and strategists stuck to their arguments that yields would fall anew. They cited long-term structural economic hindrances, such as consumers’ limited capacity to drive growth, and robust demand for fixed income from the world’s aging population.

Now the tables have turned on the bearish scenario, pulling yields back from significant technical levels that, if breached, could have accelerated the losses.

“Treasuries clearly in the end retain their safe-haven status in times of market stress,” said John Briggs, head of U.S. rates strategy at NatWest Markets.

— With assistance by Katherine Greifeld, and Benjamin Purvis

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