Bond Rout Could Be Overdone
The most oversold Treasury market since 1990 snapped back Tuesday, halting a rout that pushed yields to the highest this year, as investors questioned how much extra government spending president-elect Donald Trump will be able to implement once his administration takes office.
A market momentum gauge retreated after indicating on Monday that the selloff in 10-year Treasuries had gone too far, too fast. Long-dated U.S. debt led gains, reversing a selloff triggered by speculation that the Republican would pursue stimulative fiscal policies.
Expectations that Trump, along with a Republican-led Congress, would make good on pledges to spend $550 billion on infrastructure improvement to stoke economic growth sent inflation expectations to the highest since 2015. Yields on two-year notes, the coupon maturity most sensitive to monetary-policy expectations, rose to above 1 percent on Monday for the first time since January as traders added to bets the Federal Reserve will raise interest rates next month.
"The consensus has shifted for good reason," Matthew Hornbach, head of global interest-rate strategy at Morgan Stanley, said in an interview with Bloomberg Television. "There is some concern over the timing and the extent to which President-elect Trump will be able to follow through on some of his campaign promises specially with respect to infrastructure spending and the tax cuts."
Benchmark 10-year note yields fell four basis points, or 0.04 percentage point, to 2.22 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 2 percent security due in November 2026 rose 3/8, or $3.75 per $1,000 face amount, to 98 1/32.
The gap between yields on 10-year Treasuries and equivalent-maturity TIPS, a measure of inflation expectations, fell two basis points to 1.86 percentage points.
At the peak of the bond-market selloff on Monday, the relative-strength index for U.S. 10-year note yields rose to 83, the highest level since 1990, with a number above 70 seen as a sign that Treasury notes are becoming oversold. The gauge was at 78 on Tuesday.
While the measure is a signal to some analysts that yields are primed for a near-term pullback, the technical indicator doesn’t necessarily portend a long-term reversal. Similar readings in the past have presaged a turnaround, notably in 2012 and 2015, during 2013’s so-called taper tantrum, 10-year yields continued to climb, even as the gauge showed bonds were oversold.
"What we see is a snapback from the post-Trump revaluation on the market," said John Briggs, head of strategy for the Americas at RBS Securities Inc. in Stamford, Connecticut, one of 23 primary dealers that trade with the central bank. "We are in a consolidation phase as we wait for further details on what the actual numbers are, the timing, the efficacy, not just about his fiscal spending plan but his other plans."
Bridgewater Associates founder Ray Dalio wrote a note Tuesday indicating he’s bullish on Trump and bearish on bonds, saying it’s likely that they’ve reached a three-decade peak.
“We think that there’s a significant likelihood that we have made the 30-year top in bond prices,” Dalio wrote on his LinkedIn page Tuesday. “We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation.”
A gauge of Treasuries volatility fell after surging to the highest since February on Monday. The CBOE/CBOT 10-Year Treasury Note Volatility Index reversed a four-day gain as investors sought more clarity on the new administration. Using similar methodology to the VIX gauge of equity fluctuations, the index tracks options on 10-year Treasury note futures to measure traders’ expectations for volatility in debt prices.
Traders assign about a 94 percent probability to a Fed interest-rate increase in December, according to data compiled by Bloomberg based on fed funds futures, up from 84 percent on Nov. 11. The calculation is based on the assumption the effective federal funds rate will trade at the middle of the new range after the central bank’s next increase.
Link: http://www.bloomberg.com/news/articles/2016-11-15/most-oversold-bond-market-since-1990-rallies-back-as-rout-stalls
A market momentum gauge retreated after indicating on Monday that the selloff in 10-year Treasuries had gone too far, too fast. Long-dated U.S. debt led gains, reversing a selloff triggered by speculation that the Republican would pursue stimulative fiscal policies.
Expectations that Trump, along with a Republican-led Congress, would make good on pledges to spend $550 billion on infrastructure improvement to stoke economic growth sent inflation expectations to the highest since 2015. Yields on two-year notes, the coupon maturity most sensitive to monetary-policy expectations, rose to above 1 percent on Monday for the first time since January as traders added to bets the Federal Reserve will raise interest rates next month.
"The consensus has shifted for good reason," Matthew Hornbach, head of global interest-rate strategy at Morgan Stanley, said in an interview with Bloomberg Television. "There is some concern over the timing and the extent to which President-elect Trump will be able to follow through on some of his campaign promises specially with respect to infrastructure spending and the tax cuts."
Benchmark 10-year note yields fell four basis points, or 0.04 percentage point, to 2.22 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 2 percent security due in November 2026 rose 3/8, or $3.75 per $1,000 face amount, to 98 1/32.
The gap between yields on 10-year Treasuries and equivalent-maturity TIPS, a measure of inflation expectations, fell two basis points to 1.86 percentage points.
At the peak of the bond-market selloff on Monday, the relative-strength index for U.S. 10-year note yields rose to 83, the highest level since 1990, with a number above 70 seen as a sign that Treasury notes are becoming oversold. The gauge was at 78 on Tuesday.
While the measure is a signal to some analysts that yields are primed for a near-term pullback, the technical indicator doesn’t necessarily portend a long-term reversal. Similar readings in the past have presaged a turnaround, notably in 2012 and 2015, during 2013’s so-called taper tantrum, 10-year yields continued to climb, even as the gauge showed bonds were oversold.
"What we see is a snapback from the post-Trump revaluation on the market," said John Briggs, head of strategy for the Americas at RBS Securities Inc. in Stamford, Connecticut, one of 23 primary dealers that trade with the central bank. "We are in a consolidation phase as we wait for further details on what the actual numbers are, the timing, the efficacy, not just about his fiscal spending plan but his other plans."
Bridgewater Associates founder Ray Dalio wrote a note Tuesday indicating he’s bullish on Trump and bearish on bonds, saying it’s likely that they’ve reached a three-decade peak.
“We think that there’s a significant likelihood that we have made the 30-year top in bond prices,” Dalio wrote on his LinkedIn page Tuesday. “We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation.”
A gauge of Treasuries volatility fell after surging to the highest since February on Monday. The CBOE/CBOT 10-Year Treasury Note Volatility Index reversed a four-day gain as investors sought more clarity on the new administration. Using similar methodology to the VIX gauge of equity fluctuations, the index tracks options on 10-year Treasury note futures to measure traders’ expectations for volatility in debt prices.
Traders assign about a 94 percent probability to a Fed interest-rate increase in December, according to data compiled by Bloomberg based on fed funds futures, up from 84 percent on Nov. 11. The calculation is based on the assumption the effective federal funds rate will trade at the middle of the new range after the central bank’s next increase.
Link: http://www.bloomberg.com/news/articles/2016-11-15/most-oversold-bond-market-since-1990-rallies-back-as-rout-stalls
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