(Bloomberg) -- US Treasuries are sliding as the turmoil that gripped global markets earlier this week subsides, with investors spurning a sale of 10-year notes offered at lower yields.
The selloff pushed yields on 10-year Treasuries higher by six basis points on Wednesday to 3.95% as traders unwound wagers on deep interest-rate cuts this year. Investors shunned a $42 billion auction of benchmark 10-year securities, which drew a yield that was well above the pre-sale indicative level.
The auction result is “consistent with our view that we’re due for a continued correction higher in yield in the near-term,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. “The repricing following what was really just a moderately weak payrolls report seems way overdone.”
Weaker-than-expected demand at the sale offered a signal that a recent rally in Treasuries has run its course. Recent US jobs data and an interest-rate hike from the Bank of Japan had roiled global markets, driving investors into haven assets.
But sentiment somewhat normalized after a BOJ official reassured investors that it won’t raise rates if markets are unstable. Yields on 10-year government debt have all but erased the decline since last Friday’s employment data. A deluge of corporate bond issuance also added pressure on the Treasury market Wednesday.
Interest-rate swaps showed traders are pricing in 41 basis points of easing at the Federal Reserve’s policy meeting in September and a total of about 108 basis points by the year’s end. Just two days ago, around 150 basis points of rate cuts were expected in 2024 as traders worried the US may be sliding into a recession.
“The Treasury market is in a price discovery mode,” said Angelo Manolatos, a rate strategist at Wells Fargo Securities. “We could see a bit more of a pullback in the near-term. But with the labor market slowing and the Fed about to shift to easing mode, we look for yields to push lower and the curve to steepen over a longer horizon.”
To strategists at Goldman Sachs, US yields are “probably too low in the absence of sufficient evidence that “an acute deterioration is underway in either the labor market or in market function.”
The baseline outlook “is still consistent with a central case where 10y Treasury yields are centered above 4%,” William Marshall, head of US rates strategy, and Bill Zu wrote in a note to clients.
A $25 billion sale of 30-year bonds will mark the Treasury’s final coupon auction of the week on Thursday. A $58 billion auction of three-year notes earlier in the week had attracted decent demand.
What Bloomberg strategists say...
“Ouch. While bond yields have adjusted higher since Monday’s panicky low, they are still considerably lower than they were a few weeks ago. It seems the Street is reluctant to pay up for duration now that equities have stabilized to a degree, and today’s 10-year auction was a bit of a shocker.”
— Cameron Crise, strategist. Read more on MLIV.
Recession Fears
Meanwhile, mounting concern over a downturn have crushed market gauges of inflation expectations both in the US and Europe.
The 10-year US breakeven — the difference between the yield on inflation-protected securities and standard Treasuries — tumbled through 2% this week for the first time since late 2020. The 30-year breakeven posted a similar move.
“At the moment, the market looks to be weighing bad macro data more than constructive macro data. And that sentiment may last for a while,” said Erik Weisman, chief economist and a portfolio manager at MFS Investment Management. He is waiting for a better entry point to buy long-term inflation protection.
The Franklin Templeton Institute recommends that investors take profits on US Treasuries after the recent gains, and like Weisman, reckons it’s still too soon to suggest the economy is heading for a downturn.
Others see a more imminent threat.
“We are heading into a recession I think later this year, early next year,” said Peter Berezin, chief global strategist at BCA Research. “This is unfortunately going be just the first salvo of what’s going to be an increasingly ugly market environment for stocks.”
--With assistance from Michael Mackenzie.
(Update prices throughout.)
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