Longer-dated U.S. Treasury yields dropped to around five-month lows on Thursday as stock markets tumbled, raising fears that the rally in government debt is signaling a growing worry about the sustainability of the economic rebound from COVID, which most recently saw the S&P 500 and Nasdaq Composite end at all-time highs.

Meanwhile, on Wednesday, minutes of the Federal Reserve’s June policy meeting confirmed that policy makers are intensely discussing the timing and conditions necessary to consider a slowdown of monthly bond purchases that have helped buoy the economy during the pandemic.

How Treasurys are performing
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.292%

    yields 1.299% and hit an intraday nadir at 1.245%, compared with 1.321% at 3 p.m. Eastern Time on Wednesday.

  • The 30-year Treasury bond rate
    TMUBMUSD30Y,
    1.899%

    was at 1.906% after hitting a Thursday low at 1.855%, versus 1.943% a day ago.

  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.212%

    was at 0.204%, compared with 0.216% on Wednesday.

Fixed-income drivers

A day after a duo of record closes for U.S. stock market indexes, the S&P 500 index
SPX,
-1.36%

and the Nasdaq Composite
COMP,
-1.49%
,
government debt yields are digging deeper into the abyss, with some analysts pointing to 1.20% as possible signal from the benchmark 10-year Treasury for the broader market that fixed-income investors see problems brewing in the economy or the market, or both.

The current decline in yields has been playing out since the conclusion of the Federal Reserve’s two-day meeting on June 16.

On Wednesday, minutes from that mid-June meeting emphasized that the U.S. central bank is starting to contemplate rolling back some of its easy money measures, including its $120 billion a month asset-purchase program, which has helped to support financial markets since the height of the pandemic disruptions last year.

The minutes implied that the Fed may need to taper its asset purchases sooner than later, paving the way for interest rate increases, but the account of the central bank’s talks didn’t suggest that policy makers were unified.

The minutes did show that officials still expect recent inflation surges to be short-lived, driven by bottlenecks and a surge in post-pandemic demand.  

U.S. weekly jobless benefit claims didn’t change the complexion of the market. The number of Americans filing for first-time unemployment insurance rose 2,000 to 373,000, above expectations for a drop to 350,000.

What strategists are saying

“Bond yields had hit a closing high of 1.74% at the end of March and many believed that the yield on the 10-year Treasury note would hit 2% by the end of 2021 but yields have since executed a sharp turnaround and are now below 1.30%,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“The sharp drop in yields reflects the market’s concern that the Fed will begin tapering soon and that the removal of liquidity from the system will create volatility and a rush out of risk assets (like equities) and toward safe havens (like government bonds),” he wrote.



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