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Investors betting against Treasury bonds of the United States—or even just hiding out in cash waiting for lower prices—just suffered a rough week, even after a robust slate of economic figures showed that America’s rebound from the pandemic is gaining steam.

The debate over the long-term outlook for the $21 trillion market for Treasuries is far from over. The bearish view had dominated 2021, but it was just dealt a blow as Treasuries posted their biggest weekly rally since August. And some strategists see potential for yields to stage a brief foray to even lower levels.

Ten-year yields tumbled to just above 1.5% last Thursday, a stunning turnaround after the spectre of a 2% breach swirled just a few weeks earlier. The bond rally gained speed as evidence of robust international demand spurred some investors to exit short bets, a move that seemed to defy logic as it came amid an array of strong US economic data.

It does not look like there’s much help straight ahead for the bears, with next week devoid of major data releases, US Federal Reserve officials muzzled before their 28 April decision, and a variety of geopolitical tensions brewing. What’s more, the fate of the next US spending plan—which may include a chunk of taxes—is unclear, and the reopening push took a hit as regulators paused Johnson & Johnson’s covid vaccine roll-out.

“Lower yields, or even just no further pickup, seems to be the pain trade now," said Chris Ahrens, a strategist at Stifel Nicolaus & Co. “A lot of financial institutions are very flush with cash and had been holding on and hoping for higher yields—cheaper prices—to come back into the Treasury market. Now they are being forced to buy Treasuries at higher prices."

After the worst quarter since 1980, the Treasuries market has gained around 1% this month, paring its 2021 loss to about 3.3%, according to Bloomberg Barclays index data through 15 April.

The 10-year note yields 1.58%, down about 20 basis points from the more than one-year high reached at the end of March. Hedge funds had been massive sellers of Treasuries since the start of January. With stocks surging of late, retail buyers have also been biased against bonds, pouring more cash into equity funds. But now there’s a bullish tone emerging in parts of the rate market, with demand surfacing for options targeting a drop in 5-year Treasury yields to as low as 0.55% ahead of their May expiry, and for the 30-year bond’s yield to sink to 2.1%. Those maturities yield 0.83% and 2.26%, respectively.

Treasury yields could extend their decline, potentially taking the 10-year yield as low as 1.2%—a level not seen since February, says Tom Essaye, a former Merrill Lynch trader who started The Sevens Report newsletter. “The market is ignoring really good economic data now, so the thing that is going to get yields moving higher again is either a surprise pop in inflation or a bit of a hawkish turn in tone from the Fed," Essaye said over telephone. “I don’t see either of those things happening in the very short-term. Longer-term, I still think yields are headed higher—but we are in this weird position now where the Fed has essentially said they aren’t changing their opinion of things no matter what the data is."

Federal Reserve Chair Jerome Powell has said that while the economy appears to have turned a corner, central bankers are not in a hurry to remove monetary support. BlackRock Inc, the world’s biggest asset manager, is among those predicting the Fed will begin communicating plans to taper its bond buying in June.

Granted, Treasury bill bears can take some solace in views that surfaced at the end of the week, suggesting that it’s time to go short on Treasuries again. Mark Cabana, head of US interest rates strategy at Bank of America Corp, said on Bloomberg TV on Friday that he’s been encouraging clients to use the “little rate rally" to reset short positions. The median forecast in a Bloomberg survey is for the 10-year yield to end the year at 1.86%.

What will be under watch is America’s economic calendar. On 21 April, expect data on MBA mortgage applications, and the next day, expect the Chicago Fed national activity index, jobless claims, Langer consumer comfort, existing home sales and Kansas City Fed manufacturing activity. On 23 April, Markit’s purchasing managers indices for the US, and new home sales. Then, there’s the Fed’s auction calendar, with 13-, 26-week bills on 19 April, 52-week bills on 20 April, a 20-year reopening on 21 April, and 4- and 8-week bills plus 5-year Treasury inflation-protected securities a day later.

(Liz Capo McCormick is senior reporter, global fixed income and foreign exchange at Bloomberg News)

Edward Bolingbroke and Lu Wang contributed to this column.©bloomberg

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