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US government bonds endured another day of strong selling, shaking up the stock market as investors braced for stronger economic growth.
The benchmark 10-year Treasury yield rose as much as 0.16 percentage points Thursday to break the 1.5% threshold for the first time in a year. The five-year yield, which is considered more sensitive to monetary policy changes over the medium term, rose 0.22 points to 0.82 percent, the second-largest one-day increase in the past decade.
The sell-off in the bond market hit equities, pushing the broad S&P 500 down 2.3% and the high-tech Nasdaq Composite down 3.3% in the afternoon on Wall. Street.
This week’s strong moves in the government bond market underscore how investors increasingly anticipate the onslaught of stimulus measures from the Fed and the US Congress that will lead to a rapid rebound in economic growth.
The rapid rise in yields has taken many fund managers by surprise, with trend-following hedge funds and traditional home equity buyers rushing to protect themselves this week. His moves have exacerbated the global selloff, traders said.
Market measures of inflation expectations rose rapidly in the wake of the November US elections and even more so after Democrats took control of both houses of Congress. However, this week’s jump in Treasury yields has come as these expectations have leveled off.
At the same time, implicit rates on federal funds futures have risen steadily from zero, indicating that some investors are positioning themselves on the possibility that the US central bank will raise rates sooner than they are. thought.
“This rate move has caught many of these accounts off guard,” said Tom di Galoma, managing director of Seaport Global Holdings, referring to hedge funds and buyers of mortgage-backed securities.
“We have had a massive sale worldwide. Australia, New Zealand, Canada and most of Europe have felt this pain. But I think it comes mainly from the coverage. I don’t think there are people leaving jobs. “
The US Treasury turned to bond investors amid market crises, borrowing $ 62 billion through new seven-year notes. But investor demand was lacking, and the offer-to-cover ratio reached its lowest level since at least 2009, according to Bloomberg data.
“The middle area of the curve has seen a truly violent sell-off in the last two days and the auction results suggest that no one has the courage to try to change course,” said Thomas Simons, a money market economist at Jefferies.
The sell-off of US Treasuries followed riots in Australasian government debt markets overnight, where the yield on Australia’s 10-year note rose 0.12 percentage points to 1, 73%, its highest level since May 2019.
New Zealand’s benchmark bond yield soared more than 0.18 percentage points to just over 1.85 percent, following a statement by Finance Minister Grant Robertson that the Reserve Bank of New Zealand should take into account the overheating of house prices when setting interest rates.
“Investors saw this shift as restricting the RBNZ’s ability to continue ultra-flexible monetary policy,” said Chris Scicluna, an economist at Daiwa.
European debt was also caught in the selloff, despite some analysts arguing that this was not justified.
The 10-year German Bund yield added 0.07 percentage points to minus 0.23 percent, while the British gold equivalent yield jumped 0.05 percentage points to just under 0.8 percent.
“Some of this [selling is] indiscriminate, ”said Juliette Cohen, strategist at CPR Asset Management. “The gap between US and German bonds should be wider.
“The situation in Europe, where we have a delayed vaccination process and the reopening of economies is going to be more gradual, means that there are less inflationary pressures than in the United States.”
Cohen added that the “surprisingly rapid” rise in Treasury yields, which report what investors are willing to pay for company stocks, “has made us cautious of US stocks, where valuations are low. adjusted “. The technology-focused Nasdaq Composite Index has risen about 90 percent since March last year.
