Treasuries Finally Give In to Tech TurmoilBy and
Yield jumps below 50-day average for first time since December
Shift is ‘definitely worth watching’ amid risk-off mood
Bond bulls just sent a friend request to Facebook Inc.
The turmoil around the social media company -- and technology stocks in general -- has forced 10-year Treasury yields out of a 20-basis-point range that’s held since early February. The benchmark dropped as much as three basis points Wednesday to 2.74 percent, the lowest level since Feb. 6, following an eight basis-point drop Tuesday. The yield has broken below the key 50-day moving average for the first time since mid-December.
For those caught off-guard by the extent of the bond rally, the shift is “still not alarming but definitely worth watching current rates if equities can’t find their way home,” Jim Vogel, a strategist at FTN Financial Capital Markets, wrote Tuesday in a note. “As various tech and social media stories continue to get pummeled on a regular basis, however, trading at 2.805 percent and below is gaining ground.”
Treasuries traders are watching for any sign that this year could be déjà vu from 2017, when expectations for higher yields were dashed by March. Last year, it was disappointment over inflation misses and the Trump administration’s inability to make progress on its fiscal agenda.
Now it might just be tech stocks. The market’s darlings just logged their worst day in years, with Facebook extending its worst quarterly slide since 2012.
What’s more, positioning in Treasuries signals a shakeout could be in the offing.
As of last week, hedge funds and other large speculators had a net short position in 10-year Treasury futures that was the close to the most extreme in a year. A break of technical levels like moving averages could shift momentum and lead them to cover their bets to protect from further losses.
BMO Capital Markets strategists, who earlier this month said they’re comfortable wagering that yields already peaked for 2018, see 2.671 percent -- an intraday yield high from late January -- as the next level in sight for the 10-year maturity. It may pause at 2.752 percent, they said.
It’s not just the 10-year maturity grappling with re-pricing. Eurodollars advanced by as much as five basis points on Wednesday, while the overnight index swap market is now pricing in less than two Federal Reserve rate hikes for the remainder of the year.
And to add to the bullish momentum, on Tuesday traders bought 25,000 call options on five-year Treasuries, targeting a move toward 2.5 percent ahead of expiration on April 20, from over 2.6 percent at the time.
It might be too early to call for a revival of the bond bull market. But at the very least, yields may be busting out of their range amid the latest equities tumult.
— With assistance by John Ainger, Tanvir Sandhu, and Scott Hamilton