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Home / Business / The hustle and bustle of the bond market makes the crosshairs “the lower the better”

The hustle and bustle of the bond market makes the crosshairs “the lower the better”



The government bond plunge in February shook one of the foundations of last year’s strong stock market rebound: investors are convinced that ultra-low long-term interest rates will continue to exist.

The wave of selling in the past two weeks has pushed up the yield on benchmark 10-year U.S. Treasury bonds, which helped set the borrowing cost of all assets from corporate debt to mortgages above 1.5%, since the beginning of the pandemic The highest level, starting from 0.7% in October.

A series of officials from the Federal Reserve (Fed) stated that the climb is healthy, reflecting investors’ increasing expectations for vaccines and stimulating economic recovery. Many portfolio managers say they believe that as yields finally reach levels they find attractive, interest rates may flatten in the coming days. These views will be tested this week. Federal Reserve Chairman Jerome Powell is scheduled to make a public appearance on Thursday and release the February employment report on Friday.

However, there are signs that, for example, the demand for government bond auctions has been unusually weak recently, the sale may not end, and yields may rise further. Some traders warned that the bond market is heralding a strong economic recovery, which may subvert the drive to reduce borrowing costs while driving stocks to record highs-this may be the result of Dow Industries showing more disruptive transactions in the past week Remedy. It swings more than 1

,000 points in three days.

Michael de Pass, global head of U.S. Treasury trading at Citadel Securities, said: “People think that recovery from a pandemic seems to be different from a normal recession.”

Traders said that signs of momentum were obvious in the US Treasury auction later last week. On Thursday, demand for five-year and seven-year US Treasury bonds was weak. A $62 billion auction of seven-year Treasury bonds was about to be held, and it almost evaporated within a few minutes after the auction. This is the worst analyst remembers. once.

Analysts at Jefferies LLC said that the yield of the 7-year Treasury bond was 1.195%, which was 0.043 percentage points higher than traders’ expectations. This was a record gap in the auction of 7-year Treasury bonds. Major traders, large financial companies that can directly trade with the Federal Reserve and need to bid in auctions, only have about 40% of new bills left, about twice the recent average.

The downturn in demand worries investors because the government is expected to sell large amounts of debt in the next few months to pay for stimulus measures to stimulate economic recovery. Investors said that further poor auction results may stimulate further selling in the bond market and undermine the tone of other markets, such as the stock market.

Analysts believe that the increase in the supply of U.S. Treasury bonds may put pressure on the market this year, but “the situation is very different from when you actually trade,” said Blake Gwinn, director of US interest rate strategy at NatWest Markets. .

Some traders said that the liquidation of popular trades aggravated recent moves involving the purchase of short-term Treasury bonds and the sale of other assets to them. Many people pointed out one in particular: Holders strive to protect their mortgage bond investments to prevent rising yields. This practice is known as convex hedging in the industry.

In the past year, the Federal Reserve’s interest rate cuts have fueled a wave of home sales and refinancing, but the recent rise in yields has pushed mortgage interest rates to their highest level since November last week, and the number of applications has fallen. This forces banks and other holders (such as real estate investment trusts) to sell U.S. Treasury bonds to offset the loss of mortgage bonds when consumers stop refinancing.

Changes in market-based inflation indicators have also raised concerns. Rising prices have weakened the purchasing power of fixed payments on bonds and may force the Fed to raise interest rates early. Although inflation has remained silent for many years, usually below the Fed’s 2% target, some people worry that the Fed and Congress’s economic reopening and stimulus measures may accelerate growth.

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The five-year breakeven rate (a measure of the expected annual inflation rate in the next five years by measuring the difference between the five-year U.S. Treasury bond yield and the equivalent U.S. Treasury inflation protection securities) Day reached 2.4%, a record high since May 2011.

Morgan Stanley (Morgan Stanley) global head of macro strategy Matthew Hornbach (Matthew Hornbach) said: “The question is, once it reaches 2%, can the inflation rate be sustained?”.

He said that the scale of the US fiscal stimulus means that inflation “has a very reasonable chance of rising to 2% and staying at that level.”

At the same time, the recent rise in Treasury bond yields not only reflects the increase in inflation expectations, it is actually the same as it was earlier this year. In the past two weeks, the yield of U.S. Treasury inflation-protected securities (the so-called representative of actual returns) has also soared, with the 10-year TIPS yield rising from minus 1% to minus 0.7%.

This move caught the attention of investors because many people attribute the actual yield deeply to helping power stocks set a record, thereby pushing investors seeking yields into riskier assets. From mid-2013 to early 2020, the actual yield is about 0% or higher, which means that even after recent actions are taken, they may have more room for upside.

The yield on the benchmark 10-year US Treasury note closed at 1.459% on Friday, down from 1.513% a day ago, but higher than the 1.344% the previous weekend.

For now, many investors are turning to assets that are less susceptible to interest rate fluctuations. When yields rise, the competitiveness of stocks and bonds decreases.Stocks of some of the most popular technology stocks including Amazon.com and Apple,

It has fallen from high in the past month.

Rick Rieder, BlackRock’s global fixed income chief investment officer, said his team has been buying floating-rate loans instead of bonds to prevent interest rates from rising and benefit from economic recovery.

Mr. Rieder said: “We have converted a large amount of high-yield bond exposure into loans.” The real interest rate has been negative 1%. They are finally moving around, but there is more to go, which will eventually bring interest rates higher than they are today. “

Write to Julia-Ambra Verlaine of Julia (Julia.Verlaine@wsj.com) and Sam Goldfarb (Sam Goldfarb) of sam.goldfarb@wsj.com (sam.goldfarb@wsj.com) )

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