US Treasuries have seen another day of heavy selling, driving the stock market into turmoil as investors brace themselves for stronger economic growth.
The return on the benchmark 10-year Treasury rose by a whopping 0.16 percentage point on Thursday to cross the 1.5 percent threshold for the first time in a year. The five-year yield, considered more sensitive to shifts in monetary policy over the medium term, is up 0.22 points to 0.82 percent, the second-largest one-day increase in the past decade.
The sell-off in the bond market ricocheted in equities, causing the broad S&P 500 to drop 2.3 percent and the tech-heavy Nasdaq Composite to drop 3.3 percent in the afternoon on Wall Street.
This week’s sharp moves in the government bond market underscore how investors are increasingly anticipating the flood of stimulus from the Fed and the US Congress that will lead to a rapid recovery in economic growth.
The sharp rise in interest rates has been on the heels of many fund managers, with trend-following hedge funds and traditional mortgage buyers rushing to hedge this week. Their actions have exacerbated the global sell-off, traders said.
Market-based measures of inflation expectations rose rapidly in the wake of the US election in November and even further after the Democrats took control of both chambers of Congress. However, the rise in government bond yields this week has come as these expectations have flattened.
At the same time, implied interest rates on fed fund futures have risen steadily from zero, indicating that some investors are positioning themselves for the possibility that the US central bank will hike interest rates sooner than previously thought.
“This change in interest rates has taken many of these accounts by surprise,” said Tom di Galoma, a director at Seaport Global Holdings, referring to hedge funds and buyers of mortgage-backed securities.
“We have had a sale worldwide. Australia, New Zealand, Canada, and most of Europe have all felt this pain. But I think it mainly comes from hedging. I don’t think there are people in positions. “
The US Treasury tapped bond investors amid the market swings and borrowed $ 62 billion through new seven-year bonds. But investor demand was lacking, and the bid-to-cover ratio hit its lowest level since at least 2009, according to Bloomberg data.
“The intermediate part of the curve has undergone a really violent sell-off over the past two days and the auction results suggest that no one has the courage to try to turn the tide,” said Thomas Simons, a money market economist at Jefferies.
The sell-off of US Treasuries followed overnight in the Australasia sovereign debt market, where the yield on Australia’s 10-year bond rose 0.12 percentage point higher to 1.73 percent, the highest level since May 2019 .
New Zealand’s benchmark return increased by more than 0.18 percentage points to just over 1.85 percent, following a statement by Treasury Secretary Grant Robertson that the Reserve Bank of New Zealand should consider overheating when setting interest rates house prices.
“Investors saw this change as limiting the RBNZ’s ability to continue with its extremely simple monetary policy,” said Chris Scicluna, an economist at Daiwa.
European debt was also swept up in the sell-off, although some analysts argued this was unjustified.
The German 10-year yield on German government bonds added 0.07 percentage point to minus 0.23 percent, while the return on the equivalent British gold rose 0.05 percentage point to just under 0.8 percent.
Part of this [selling is] arbitrary, ”said Juliette Cohen, strategist at CPR Asset Management. “The gap between US and German bonds should be wider.
“The situation in Europe, where we have a delayed vaccination process and the reopening of economies will be more gradual, means there are less inflationary pressures than in the US.”
Cohen added that the “surprisingly rapid” rise in government bond yields, which indicates what investors are willing to pay for corporate shares, “has made us cautious about US stocks, where valuations are tight.” The technology-focused Nasdaq Composite index is up about 90 percent since March last year.