Long-dated U.S. Treasury yields retreated and prices rose by the most in weeks on Monday, offering a modest reprieve for government bonds that have been hurt as investors worry about rising inflation as the economy recovers.
The Federal Reserve decision last week to stop allowing banks to exclude Treasurys from their so-called supplementary leverage ratios as of April 1, likely also will weigh on government bonds in coming months, experts said.
How are Treasurys faring?
- The 10-year Treasury note yield TMUBMUSD10Y, 1.694% traded to 1.682%, a 4.7-basis point retreat, compared with 1.729% rate to end Friday trade at 3 p.m. Eastern. Monday’s move for the benchmark yield, was its biggest daily decline since March 9, according to Dow Jones Market Data.
- The 30-year Treasury bond yield TMUBMUSD30Y, 2.406% was at 2.381%, a 7 basis points drop, compared with 2.451% on Friday. The daily drop for the so-called long bond was its steepest since Feb. 26.
- The 2-year Treasury note TMUBMUSD02Y, 0.153% finished virtually unchanged at 0.149%.
Bond prices fall as yields rise.
What’s driving the bond market?
Fixed-income investors have been closely watching comments from the Federal Reserve for guidance on the outlook for inflation even as many bet it might rise more rapidly than central bankers estimate.
Adding to the pressures on bonds is the impending end of capital relief for banks, which has been viewed as one factor behind the rise in yields, as it could remove a major buyer of Treasurys if banks no longer can exclude Treasurys and deposits held at the central bank from their so-called supplementary leverage ratios, or SLR, a key measure of balance-sheet strength.
As the Wall Street Journal explains, the SLR measures the total size of a bank balance sheet and sets a minimum capital requirement and relief, meaning Treasury holdings will count as assets and require more capital, potentially adding volatility to financial markets.
There are more than $100 billion in government debt auctions slated for the week, which could provide the first test of the market’s appetite in the wake of the Fed’s announcement.
Meanwhile, the steady rise in bond yields has helped to create friction in the stock market, making highflying technology and tech-related stocks comparatively more expensive to own.
Last week, the Fed promised to keep rates lower for longer as the U.S. economy recovers from the COVID-19 pandemic but investors still fear that the central bank may have to move faster than it is anticipating if the economy runs hot.
Markets also absorbed developments in emerging markets, after President Tayyip Erdogan replaced a hawkish central bank governor with one who favors low interest rates, sending Turkey’s lira USDTRY, +7.78% plunging briefly.
What are fixed-income analysts saying?
“Economic growth will be strong and inflation in the second quarter will be elevated due to the base effects,” wrote Richard Saperstein, chief investment officer at Treasury Partners, in emailed comments. “Almost one year ago, oil prices were negative, which will skew the upcoming inflation numbers. We expect inflation readings to moderate during the second half of 2021,” he wrote.
“Sovereign credit default swaps around the world—not just Turkey—are higher, but there were no sizable flows to quality assets overnight. Instead, Turkey’s return to currency confusion adds to an international backdrop that has weighed against US-centric optimism for weeks, but has not retarded risk asset momentum,” wrote Jim Vogel, executive v.p. at FHN Financial.
“The absence of any meaningful follow-through in domestic equities speaks to the notion 10-year yields reached the 1.75% and have shifted into a period of consolidation with a slight bull flattening skew,” wrote Ian Lyngen and Benjamin Jeffery, fixed-income strategists at BMO Capital Markets.