US government bonds endured another day of heavy selling, jolting the stock market, as investors braced themselves for stronger economic growth.
The yield on the benchmark 10-year Treasury rose as much as 0.16 percentage points on Thursday to exceed the 1.5 per cent threshold for the first time in a year. The five-year yield, which is considered to be more sensitive to medium-term monetary policy shifts, jumped 0.22 points to 0.82 per cent, the second-largest one day rise seen over the past decade.
The sell-off in the bond market ricocheted into equities, pushing the broad S&P 500 down 2.3 per cent and the tech-heavy Nasdaq Composite down 3.3 per cent by afternoon on Wall Street.
This week’s sharp moves in the government bond market underscore how investors are increasingly anticipating the flood of stimulus measures from the Fed and US Congress will lead to a rapid rebound in economic growth.
The brisk rise in yields has caught many fund managers on the back-foot, with trend-following hedge funds and traditional buyers of mortgage bonds rushing to hedge themselves this week. Their moves have exacerbated the global sell-off, traders said.
Market-based measures of inflation expectations rose rapidly in the wake of the US election in November and further still after Democrats took control of both chambers of Congress. However, this week’s jump in Treasury yields has come as these expectations have levelled off.
At the same time, implied rates on fed fund futures have steadily risen from zero, indicating some investors are positioning for the possibility the US central bank will lift rates sooner than previously thought.
“This rate move has caught a lot of these accounts off guard,” Tom di Galoma, a managing director at Seaport Global Holdings, said, referring to hedge funds and buyers of mortgage-backed securities.
“We’ve had a sell-off globally. Australia, New Zealand, Canada, and most of Europe have all felt this pain. But I think it is coming mostly from hedging. I don’t think there are people bailing on positions.”
The US Treasury tapped bond investors in the midst of the market ructions, borrowing $62bn through new seven-year notes. But investor demand was lacking, with the bid-to-cover ratio hitting its lowest level since at least 2009, according to Bloomberg data.
“The intermediate area of the curve has undergone a truly violent sell-off over the last two days and the auction results suggest no one has the stomach to try and step in to turn the tide,” said Thomas Simons, a money market economist at Jefferies.
The US Treasuries sell-off followed ructions in the Australasia government debt markets overnight, where the yield on Australia’s 10-year note raced 0.12 percentage points higher to 1.73 per cent, its most elevated level since May 2019.
New Zealand’s benchmark bond yield soared more than 0.18 percentage points to just over 1.85 per cent, following a statement by finance minister Grant Robertson that the Reserve Bank of New Zealand should take overheating house prices into account when setting interest rates.
“Investors viewed this change as restricting the RBNZ’s ability to continue with ultra-easy monetary policy,” said Chris Scicluna, an economist at Daiwa.
European debt was also caught up in the wave of selling, despite some analysts arguing this was not justified.
Germany’s 10-year Bund yield added 0.07 percentage points to minus 0.23 per cent while the yield on the equivalent UK gilt jumped 0.05 percentage points to just under 0.8 per cent.
“Some of this [selling is] indiscriminate,” said Juliette Cohen, strategist at CPR Asset Management. “The gap between US and German bonds should be wider.
“The situation in Europe, where we have a delayed vaccination process and the reopening of economies is going to be more gradual, means there are fewer inflationary pressures than in the US.”
Cohen added that the “surprisingly rapid” run-up in Treasury yields, which inform what investors are willing to pay for companies’ shares, “has made us cautious on US equities, where valuations are tight”. The tech-focused Nasdaq Composite index has risen about 90 per cent since March last year.
Credit: Financial Times