The U.S. economic re-opening trade is back in full force, sending 10-year Treasury yields to 1.77% for the first time since January 2020.
With the Biden administration rolling out plans to accelerate the vaccine campaign and rebuild U.S. infrastructure, investors are doubling down on bets on the U.S. economic recovery. Yields on bonds climbed to fresh highs on Tuesday and the dollar strengthened.
Cue the long-running debate about whether the Federal Reserve can keep inflation at bay.
“U.S. Treasuries care more about inflation than Archegos fallout, and they continue their fall,” Steen Jakobsen, chief investment officer at Saxo Bank in Hellerup, Denmark, wrote in a note.
All this just days after the downfall of Bill Hwang’s Archegos Capital Management—and one of the biggest margin calls in history—shows the irrepressible optimism of reflation-driven markets.
Yields on five-year Treasuries rose above 0.9%, followed by a block sale in the notes, before touching their highest level in 13 months. While blocktrades are common they’ve made headlines this week by adding to the pressure surrounding Archegos. Treasury 10-year note futures volumes were running 50% over 20-day average levels from 7 a.m. London up to the start of the U.S. session.
The selloff rippled through European markets with benchmark U.K. bonds climbing as much as seven basis points to 0.85% and their German and Italian peers experiencing similar moves. Risk appetite is surging as investors weigh a stronger-than-expected global recovery, and a pledge that 90% of U.S. adults will be eligible to get a Covid-19 shot by April 19. The U.S. reached a record three-day stretch of 10 million shots over the weekend, according to the Bloomberg Vaccine Tracker.
Asset managers say the boost to sentiment means the Treasury rout has further yet to run. Charles Diebel, who manages about 4.5 billion euros ($5.3 billion) at Mediolanum in Dublin, sees benchmark Treasury yields pushing toward 2% in the second quarter. “It will be volatile but the selling isn’t done yet,” he said.
The bund selloff may prove limited in the near term given the negative net Euro government bond supply in April and the elevated bond buying by the European Central Bank, said Bank of America strategist Sphia Salim. HSBC Holdings Plc sees bund yields falling to -0.3% by the end of June, according to head of U.K. rates strategy Daniela Russell.
Currency traders are piling into the dollar, with the greenback outperforming all its Group-of-10 peers. Investors ditched havens with the yen leading losses in the cohort, and there’s further bad news on the horizon for the Japanese currency—sentiment on the dollar against the yen is at its least bearish in more than four years.
“The weaker yen is more a dollar story,” said Andreas Koenig, head of global foreign exchange at Amundi Asset Management. “A wider yield gap is to be expected and the yen weakness could go further.”
The Treasury selloff will likely last the week, said John Roe, the London-based head of multi-asset funds at Legal & General Investment Management, who is tactically short on U.S. debt. There’s a realistic chance Friday’s payroll data will show one million jobs added in March, he said.
“We think more investors are positioning for that,” he said. “If you want to see how quickly an economy can rebound, and surprise experts, just look at Australia. That same narrative could play out in the U.S.”
Market participants had been prepared for a period of grace in bond markets.
Quarter-end re-balancing flows into bonds from stocks had been expected to boost demand in the short term. The start of Japan’s fiscal new year from April 1 also had many anticipating fresh demand from one of the biggest buyers of Treasuries in the past. Bond market volatility has tended to cool off in April in the past.
Other markets are getting rocked too. Australia’s 10-year bond yield rose as much as 10 basis points, with losses amplified by concerns ahead of Wednesday’s A$2 billion ($1.5 billion) debt sale, the first of material size in a month.
—With assistance from Jill Ward, Ksenia Galouchko, James Hirai, Sid Verma, Liau Y-Sing, Anchalee Worrachate, Edward Bolingbroke and Tan Hwee Ann.
This article was provided by Bloomberg News.