The US government bond market suffered its worst sell-off in more than two months on Monday as contagion from the European bond rout rolled across the Atlantic, pushing US borrowing costs towards their highest closing levels this year.
The US Treasury market has felt the heat from the turmoil in eurozone debt markets in recent weeks, but has generally held up better than most European government bonds, which have suffered a sharp reversal from the quantitative-easing inspired rally earlier this year.
The US resilience evaporated on Monday, as the 10-year Treasury yield shot up by 13 basis points — the most since March 6 — to 2.28 per cent. The 10-year yield touched a 2015 intraday high of 2.31 per cent last week, but Monday’s close was the highest closing level this year. German government bonds suffered further falls, but the benchmark 10-year Bund yield only rose 6bp to 0.6 per cent.
Most analysts and investors have attributed the gyrations to an overdue reversal of stretched and crowded trades, with the turmoil exacerbated by a dearth of liquidity in bond market trading.
A trickle of selling is turning into a torrent,” said William O’Donnell, head of US rates strategy at RBS. “Bonds have been overbought for some time now?.?.?.?The risk is that we now see a very significant correction.”
In the US longer-dated Treasuries have taken the biggest hit, with the 30-year yield climbing 13bp to above the 3 per cent mark for the first time in 2015. That has lifted the difference between the five and 30-year yields to 145 basis points, the most since November.
The jump in the “term premium” — the extra interest investors demand to buy longer-dated bonds — comes after Federal Reserve chairman Janet Yellen last week warned that the rally in longer-dated Treasuries could be reversed quickly when the central bank begins to raise rates.
“Long-term interest rates are at very low levels, and that would appear to embody low term premiums, which can move, and can move very rapidly,” Ms Yellen said after a speech in Washington on Wednesday, according to newswires. “We need to be attentive, and are to the possibility that when the Fed decides it’s time to begin raising rates, these term premiums could move up, and we could see a sharp jump in long-term rates.”
While a spate of poor economic data means the Fed might not raise rates until after the summer, the sell-off in Europe appears to have led to a reappraisal of the “curve flattening” trade in the US, where long-term bonds have rallied further than shorter-dated debt.
“This is the term risk tantrum,” Mr O’Donnell said. “Positioning is all screwed up. People are in the wrong securities, at the wrong price and with the wrong duration.”
Ian Lyngen of CRT Capital also attributed rising Treasury yields to investors selling US government debt to make room for an expected rush of higher-yielding corporate debt sales in the coming week, after a rush of issuance in
April. He estimated there could be $30bn to $40bn of issuance this week, “with risks skewed toward the upper-end”.
One government bond trader noted that the volume of Treasury bond selling was fairly modest compared to the scale of the rout, indicating that even the world’s biggest and most liquid bond market is suffering from atrophying fixed income trading.
