Bond rally spreads to shorter-term treasurys2 min read . Updated: 09 Jul 2021, 07:45 PM IST
- Decline in yields suggests investors think it could take longer for Fed to raise interest rates
U.S. government bonds extended their recent rally Thursday, pushing the 10-year yield below 1.3% while further declines in shorter-term yields suggested traders were scaling back bets on Federal Reserve interest-rate increases.
The yield on the benchmark 10-year U.S. Treasury note settled at 1.287%, according to Tradeweb, compared with 1.321% Wednesday and 1.479% one week ago.
Yields, which fall when bond prices rise, have trended lower for months but have accelerated their declines in recent days, creating their own momentum as more investors unwind bets on higher yields.
While many investors still expect strong economic growth and inflation over the coming months, recent developments have caused some to question their most optimistic forecasts. The result has been a domino effect, according to investors and analysts, with the rally steadily sweeping up more and more holdouts who might still think yields should go higher but who have nonetheless bought Treasurys in recent weeks to avoid underperforming peers and their benchmark indexes.
Investors have pointed to several factors that have tempered their enthusiasm. Those include reduced expectations for fiscal and monetary stimulus, a run of economic data that has fallen below forecasts, and the spread of the Delta variant of Covid-19 that one study suggested might cause more infections even among vaccinated populations.
Such has been the intensity of this week’s bond rally that even short-term Treasury yields have fallen sharply. While longer-term yields have been sliding for months, yields on shorter-term Treasurys have often moved in the opposite direction—a sign that investors thought the Fed might raise rates sooner the economy could handle it.
The yield on the benchmark two-year Treasury climbed from 0.165% on June 15 to 0.270% on June 25 after Fed officials signaled in their last policy meeting that they expected to lift their benchmark rate earlier than they had previously anticipated. However, the two-year yield closed Thursday at 0.192%, having dropped from 0.255% just a week ago.
In some ways, that decline represents a natural follow-through from the rally in longer-term bonds, some investors said.
If longer-term yields “are coming down, in theory that means a slower growth trajectory… which means front end rates shouldn’t be as high to reflect Fed hikes," said Jim Caron, senior portfolio manager and chief strategist of global fixed income at Morgan Stanley Investment Management.
Mr. Caron, though, is still among those who think yields are now lower than is justified by the economic outlook.
“If I just kind of put it together and say: we’re still going to have inflation above 2% next year and we’re going to have growth around 4%, should Treasury yields be at 1.2%? Probably not," he said.
(This story has been published from a wire agency feed without modifications to the text)
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