Treasuries came under pressure again yesterday, with the 30-year yield edging up one bps to 4.98%. — Bloomberg
NEW YORK: Treasuries have dropped, following a slump in longer-maturity European debt, with the US 30-year yield climbing toward 5% at the start of a month historically tough for long bonds.
Longer-maturity yields climbed about three basis points (bps) on Tuesday, trading off their session highs after ISM manufacturing data showed weakness in overall activity, employment and prices paid.
Treasuries came under pressure again yesterday, with the 30-year yield edging up one bps to 4.98%.
The negative sentiment is spilling to other markets in Asia. Japan’s 20-year government bond yield advanced to the highest level since 1999, while Australia’s 10-year yield advanced five bps to a level last seen in July.
The Treasury market faces an important week of economic data, including the August employment report tomorrow that stands to determine to what extent the Federal Reserve (Fed) will resume a widely expected easing cycle this month.
Contributing to the pressure in Treasuries was the typical post-Labour Day flurry of corporate debt offerings as 27 companies conducted investment-grade sales.
The vulnerability of global long-dated government debt reflects the accumulation of heavy spending, particularly after the pandemic, that requires rising sales of bonds to finance.
As the US 30-year yield rose to near 5%, its UK peer hit the highest since 1998. The equivalent rate on French notes rose six bps to 4.51%.
“The bond market is telling you, not just here but everywhere else, it is worried about the path that we are on,” Kathy Jones, chief fixed income strategist at Charles Schwab & Co, told Bloomberg Television.
“The market will continue to price in a higher-term premium until we get some sort of coherent policy or a signal that the economy is slowing down. We might get that in the jobs report.”
The ISM report was “in line with weak expectations for the labour market and some recovery in demand looking ahead,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment.
The Treasury market began the month looking a little expensive, while “September is historically a poor month for duration risk,” or longer-dated interest-rate exposure, he said.
Over the last decade, government bonds globally with maturities of over 10 years posted a median loss of 2% in September, according to data compiled by Bloomberg.
That’s the worst monthly performance of the year.
“Some of this September phenomenon” of higher long-dated yields certainly has been realised in the past and obviously today it’s being realised with a fair amount of corporate issuance that for this month will be potentially US$160bil,” said Michael Cudzil, senior portfolio manager at Pimco.
The surge in UK and European 30-year yields helped drive the US benchmark just shy of 5%, before buyers emerged, with a number of block trades taking place in futures.
Trades included a buyer of 10,000 10-year note contracts, helping pull yields off the highs of the day at around 9AM in New York.
“The 30-year bonds may just be stalling a little here against 5%,” said John Briggs, head of US rates strategy at Natixis North America. “I don’t think it’s a magical number at all and I have had some serious concerns for the last week or two about global long ends.”
Briggs said a US interest-rate cut into high inflation would be “a pretty simple recipe for steeper curves”.
Traders are currently pricing 21 bps of a quarter-point cut at this month’s Fed meeting, with a little over two quarter-point reductions in total priced by the end of the year. — Bloomberg
