10-year Treasury yield could revisit 4.5-5% on reflation trade
- Gregory Faranello, Head of U.S. Rates for AmeriVet Securities in New York, said he sees a “higher-yield story from here,’’ with the 10-year rate possibly reaching 4.5%-5% in the next month or so.
After months of rangebound trading, the benchmark 10-year Treasury yield appeared to be settling into a pattern similar to what was seen last October, when the rate soared to its highest level since 2007 and briefly burst through 5%.
An aggressive selloff of long-dated U.S. government debt, triggered by Monday’s manufacturing-related reading from the Institute for Supply Management, continued for a second session on Tuesday, spreading across assets and around the globe. The 10-year rate BX:TMUBMUSD10Y — used as a benchmark for everything from student debt to auto loans and mortgages — rose 3.4 basis points to end at 4.363% or its highest level since Nov. 27. Yields as far away as Asia, Australia, New Zealand and Europe climbed in unison.
A so-called reflation trade, triggered by signs of persistent U.S. inflation, gripped financial markets — prompting investors to sell off stocks and government debt in tandem, sending oil CL.1, 0.63% above $85 a barrel for the first time since October, and sparking a rally in gold and silver. The U.S. Dollar Index DXY also touched a 4.5-month high.
See also: Fears over persistent inflation resurface in U.S. Treasury market, ushering in volatility
Gregory Faranello, head of U.S. rates for AmeriVet Securities in New York, said he sees a “higher yield story from here,’’ with the 10-year rate possibly reaching 4.5%-5% in the next month or so. A 5% Treasury yield is the level that others in the financial market have associated with a likely stock-market correction.
“It definitely feels to me that yields want to move higher more than they want to move lower,” Faranello said via phone on Tuesday. “The higher-for-longer narrative is en vogue and Friday’s jobs number, which should turn out to be fine, is likely to add fuel to the fire.”
Economists expect Friday’s nonfarm payrolls to reflect 200,000 jobs created in March, a number that would suggest the labor market remains relatively healthy despite interest rates staying between 5.25% and 5% since last July.
Ahead of that report is a long lineup of Federal Reserve officials scheduled to speak every day this week. Treasury yields still have room to run higher if their remarks suggest Chairman Jerome Powell’s dovish tone on March 20 doesn’t represent the rest of the Federal Open Market Committee’s thinking, according to Thierry Wizman, global FX and rates strategist at Macquarie.
The Treasury market had been trading “sideways” for the last couple of months, but now “the path of least resistance is for rates to go higher before they come down,” AmeriVet’s Faranello said. A 10-year rate that heads for 4.5%-5% would knock the equity market lower and tighten financial conditions from here, but would also open an opportunity for investors to add duration, he said.
Faranello isn’t entirely alone in his thinking about the likely path forward for yields. Economists at Mizuho 8411, +0.24% said there’s “a real risk that long-term rates will grind higher,” and they think the “risk of the curve steepening from the long end needs to be taken seriously.”
The end of any calendar quarter is typically accompanied by a rebalancing of portfolios by investors, who then unwind some of their buying of Treasurys after the next quarter begins.
BMO Capital Markets strategists Ian Lyngen and Vail Hartman said the selling pressure in the Treasury market was “likely more about the calendar turn, positioning, and specific flows than any true fundamental shift.”
Still, “what’s unique about the current episode is simply the magnitude of the backup in yields and how quickly the move has occurred,” they wrote in a Tuesday note titled “Next Stop 4.50%?” “Our take is that while 4.50% is certainly achievable, absent any coordinated shift in Fed rhetoric or data surprise, such a selloff would ultimately prove a buying opportunity,’’ which would push the 10-year yield back down again.
Meanwhile, Faranello said Tuesday’s financial-market moves appeared to have little to do with the unwinding of quarter-end moves, and more to do with the reflation trade. “This is a different trade entirely, fueled by the economic data,’’ he said.
On Tuesday, all three major U.S. stock indexes DJIA SPX COMP finished lower, with the Dow Jones Industrial Average falling 1% or 396.61 points.