Long-dated government U.S. bond yields saw a drop deepen Wednesday, a decline that has raised eyebrows in fixed-income circles, even as the Federal Reserve’s minutes appeared to confirm its collective desire to pull back on accommodative monetary measures sooner than expected in the recovery from the pandemic.

How Treasurys are performing?

The 10-year Treasury note rate
TMUBMUSD10Y,
1.318%

was at 1.321%, hitting an intraday low at 1.285%, compared with 1.369% at 3 p.m. ET, hanging around its lowest levels since February. Yields for debt fall as prices rise.

The 30-year Treasury bond
TMUBMUSD30Y,
1.940%

was yielding 1.943%, versus 2.003% a day ago, and trading near its lowest since around February.

The 2-year Treasury note rate
TMUBMUSD02Y,
0.220%

was at 0.216%, from 0.220% on Tuesday, and touching its lowest rate in about three weeks.

The 10-year note registered its lowest close since Feb. 18, while the 30-year touched its lowest rate, on a 3 p.m. ET basis, since Feb. 10.

Fixed-income drivers

Long-dated Treasury yields deepened their slide to their lowest levels since mid February, even as minutes from the Fed’s most recent meeting in June showed that “various” members of the rate-setting Federal Open Market Committee believed that “significant further progress” for the economy’s rebound from COVID-19 could be achieved, warranting a reduction in the pace of asset purchases “somewhat earlier” than they had anticipated.

The report comes as yields were sliding and a number of economists think it is time for the Fed to move on tapering its market-stimulative asset purchases and normalizing interest rates, which currently stand at a range between 0% and 0.25%. But there is concern that any move to the exit could set off an outsize market reaction as it did in 2013, known as the taper tantrum.

Thus far yields on the longer end of the yield curve have skidded lower, puzzling some analysts because concerns about inflation persisting and eventually higher rates are theoretically bearish for bonds.

Some Fed members advocated for beginning tapering by reducing the Fed’s monthly purchase of $40 billion in mortgage-backed securities, given the view that the red-hot housing market doesn’t need the support. Other members believe that reductions should be done across the board.

A variety of factors have also been blamed for increasing Treasury buying, including government debt seeing some spillover buying from Europe as Germany’s 30-year bond yield
TMBMKDE-30Y,
0.185%

falls to the lowest levels since March.

Concerns about the state of the labor market in the rebound from COVID also has been credited as a factor for lower Treasury rates. Indeed, a report on job openings in the U.S. for May rose to a record 9.21 million, the third rise in as many months and suggesting that businesses are struggling to fill the mountain of available jobs. Although the U.S. created 850,000 new jobs in June, it would take more than a year at that rate to restore employment to pre-pandemic trends.

Some technical factors also seen amplifying buying in Treasurys, with some traders being forced to unwind bearish bets that prices would fall and yields rise. Lower liquidity in the days following the Fourth of July holiday may also be contributing to the moves, analysts speculated. The Fourth of July holiday fell on a Sunday this year and was observed on Monday.

Stalled business reopenings from COVID and outright reversals of plans amid the acceleration of the delta variant of the coronavirus that causes COVID in some parts of the world were also driving some haven buying, analysts said.

Meanwhile, the International Monetary Fund on Wednesday said further fiscal stimulus in the U.S. could fuel sustained inflationary pressures that could require the Fed to raise interest rates faster than they would prefer.

“While further fiscal support in some major advanced economies, including the United States, would benefit growth more broadly, it could also further fuel inflationary pressures,” the IMF said in its report.

What strategists are saying

“Minutes of the June FOMC meeting at which Fed policymakers began talking about talking about tapering and delivered a big shift in their interest rate dots do not come across as particularly hawkish but are consistent with the view that we are moving towards tapering—around the end of the year in the base case, but with an option to speed up if needed,” wrote Krishna Guha, a former top Fed staffer and now vice chairman of Evercore ISI.

“Our view on tapering remains base case tapering around the end of the year but that the Committee took out in June the option to accelerate the timeline if needed to safeguard inflation expectations against upside risk—an option that recent bond market developments suggest is not likely to be needed,” he wrote.

“Given the lack of new news, the market is left to worry about tapering (interest rates lower, stocks higher) and investors will continue to closely watch each new economic data release for clues as to when the Fed will announce their tapering program,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in emailed comments.

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