Optimism seeps into Treasurys, fueled by hopes for intervention and ‘some positive news’ out of Powell
By: Vivien Lou Chen
Investors have been turning upbeat about government bonds in recent days, helping the benchmark 10-year Treasury note break a 12-week losing streak at the end of last week.
A rally in long-dated government debt resumed on Tuesday, following a brief one-day selloff in the prior session — sending yields on the 10- TMUBMUSD10Y, 3.867%, 20- and 30-year maturities TMUBMUSD30Y, 4.055% lower in New York trading. Lower yields reflect higher demand for the underlying Treasurys since prices and yields move in opposite directions.
Until roughly a week ago, expectations for an unrelenting Federal Reserve to stick with aggressive rate hikes in hopes of driving down the hottest inflation in four decades fueled a rapid selloff in Treasurys, pushing 10- and 30-year yields to their highest levels in at least a decade by the end of U.S. trading on Oct. 24.
Since then, however, the narrative has shifted toward two possibilities: One is hope that Federal Reserve Chairman Jerome Powell might say something which suggests the central bank will ease off aggressive rate hikes soon, after the central bank delivers one more 75-basis-point rate hike on Wednesday. The other is the prospect of government intervention to address poor liquidity in the $24 trillion Treasurys market. The two lines of thinking, along with the ability to finally earn a decent yield, are adding up to renewed interest in long-dated government debt.
After the 10-year yield peaked at 4.3% on an intraday basis Oct. 20, “yield levels got to fairly attractive levels and some buying came back into the marketplace, with some people squaring up positions,” said Greg Faranello, Head of U.S. Rates at AmeriVet Securities in New York. That contributed to the 10-year rate’s drop to as low as 3.9% on Oct. 26, or within a matter of a week.
As investors braced for Wednesday’s widely expected rate hike by the Federal Open Market Committee, Treasurys put in “a solid performance overnight,” leaving yields in the process of a “pre-FOMC consolidation,” according to BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. In a note, they said there’s a “collective sense that a policy pivot is the next macro event.”
Nonetheless, economic data released on Tuesday, which showed that U.S. job openings rose to 10.7 million in September, dented the stock market’s hopes for a slower pace of Fed rate hikes and was enough to send the policy-sensitive 2-year Treasury yield above 4.5% as investors sold off short- to intermediate-dated government debt.
Meanwhile, demand for long-dated debt remained in place, leaving the 10-, 20- and 30-year yields all lower on Tuesday: The 10-year yield was down at 4.05%, the 20-year was 4.37%, and the 30-year rate was 4.12% as U.S. stocks SPX, -0.03% DJIA, 0.29% gave up early gains to finish lower.
Via phone on Tuesday, Faranello said “the market is looking for Powell to convincingly say the Fed is going to downshift, but I’m not sure the market is going to get what it’s looking for. We are going to get a lot more inflation data, so while there may be a debate between a 75-basis-point hike and a 50-basis-point one going forward, I’d be surprised if he laid all his cards on the table.”
“This market is really hungry, after a very long year, for some positive news coming out of the Fed,” he said. It’s prepared for a “dovish hike,” or rate increase delivered with a relatively easier policy outlook, and “markets are susceptible here to being disappointed, which could affect asset classes across the board.”
Meanwhile, reports suggesting that the Treasury Department might be willing to intervene in the government-bond market is another variable behind why some investors are stepping back into bonds, according to Faranello. On Sunday, the Financial Times reported that bond investors are urging the Treasury Department to step in after months of volatility.