Bond Report: Treasury yields retreat from multiyear high as traders unwind shorts

Treasury prices rebounded on Thursday, pushing yields lower, as traders unwound short bets on government paper after the previous session’s selloff, analysts said.

How are Treasurys performing?

The 10-year Treasury note yield TMUBMUSD30Y, -0.72% fell 2 basis points to 2.893%, after hitting 2.940%, its highest yield level since around January 2014, according to WSJ Market Data Group.

The yield for the 30-year bond TMUBMUSD30Y, -0.72%  declined by 4.5 basis points to 3.131%.

The two-year note yield TMUBMUSD02Y, +0.58% the most sensitive to shifting expectations for Fed policy, picked up 0.8 basis point to 2.189%, after surging by 6.8 basis points on Wednesday to mark its largest one-day yield rise since March 2, 2017 and its loftiest level since Sept. 12, 2008, three days before the collapse of Lehman Brothers during the start of the financial crisis.

Treasury yields and prices move in the opposite directions.

What’s driving the market?

After consumer inflation data came in stronger than expected Wednesay, the 10-year yield hit a four-year high. But traders said the selloff extended too far, leaving hedge funds to unwind their short bets on government paper. The short trades were bets bond prices would fall and served as a way to insulate investors from rising rates.

Once yields rose to a profitable level, many of these speculators cashed in and the bond market rose on a relief rally. The Commodity Futures Trading Commission previously reported that the number of speculative bearish bets exceeding bullish ones on the 30-year bond futures hit a record in the week ended Feb. 6, while net bearish bets on 10-year note futures were close to a yearlong high.

Inflation still remains the main focus for bond investors after the consumer-price index in January rose 0.5%, above the 0.4% forecast by economists polled by MarketWatch. The core gauge, which strips out volatile food and energy prices, rose 0.3%, higher than the 0.2% expected.

Rising inflation over the past several months has spooked bond investors, which have enjoyed a period of ultralow rates supported by the Federal Reserve. However, signs of rising prices risk ending a prolonged bull market in the bond market because the U.S. central bank may feel compelled to lift interest rates at a faster clip—four rate increases rather than three expected—amid reemergent inflation.

Accelerating borrowing costs and inflation also have been a source of consternation for stocks, pushing the Dow Jones Industrial Average DJIA, +0.43% the S&P 500 index SPX, +0.49% and the Nasdaq Composite Index COMP, +0.88%  into correction territory last week However, the stock market mostly shook off those worries with stocks pushing for a fifth straight day of gains Thursday.

Still, climbing yields have the potential to create further friction in markets as investors weigh bonds offering comparatively more attractive yields against relatively riskier stocks.

Meanwhile, economists at the Cleveland Federal Reserve projected that core CPI, which came in at 1.8% on Wednesday, could rise to 2.8%, with headline prices rising to 3.4% in this first quarter. That would put inflation well above the Fed’s 2% annual target.

What other data are in focus?
  • A report on weekly jobless claims hit 230,00 for the week ending Feb. 10, matching forecasts from economists polled by MarketWatch.
  • Wholesale prices rose 0.4%, also matching expectations.
  • The Empire State Manufacturing survey slipped to 13.1 from 17.7
  • Philadelphia Federal Reserve’s business-outlook survey rose to 25.8 from 22.2
  • A January report on industrial production was down 0.1%, well below the 0.3% increase expected.
What are strategists and traders saying?

“What’s happening here today is that we were severely oversold yesterday on the better than expected CPI data, which caused large duration hedge in futures to be sold all day,” said Tom di Galoma, managing director of Treasurys trading for Seaport Global Securities.

“As a hedge against rising interest rates, across the board from short futures to long futures contracts, you saw a significant short base increase. I think what we’re seeing some people taking some of that risk off,” he said.

“The sell-off in financial markets, which was triggered by a reassessment of the outlook for US inflation and interest rates, has meant that government bond yields have jumped. But these recent moves are not yet a major cause for concern. Monetary aggregates and bank lending are still expanding steadily, and credit spreads on junk bonds remain close to post-crisis lows,” wrote strategists at Capital Economics in a Thursday note.

What other assets are in focus?

The yield of the 10-year German bond TMBMKDE-10Y, +1.12% known as the bund, was up one basis point to 0.763%, after being initially up to an intraday high of 0.794%, with European equity markets SXXP, +0.53% also on the rise.

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