Plenty of catalysts to help push Treasury rates above 2018 highs

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(Bloomberg) – The relentless bear market in US Treasury debt is on the cusp of a new phase, with yields across much of the maturity spectrum poised to surpass their 2018 highs and several major potential catalysts for help in such development.

The center stage will be April consumer price inflation on Wednesday, which is expected to decline from March rates that were the highest since 1982. Federal Reserve officials, who raised rates by half -point this week and set a date of June 1 to begin reducing holdings of Treasuries, will be out in force to discuss their approach to inflation. Meanwhile, the biggest month of Treasury debt sales for the May-July funding quarter kicks off with auctions of 3-, 10- and 30-year debt.

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While none of these provide a logical impetus for higher yields, liquidity has deteriorated, making the Treasury market more sensitive to big changes. Bloomberg’s U.S. Government Securities Liquidity Index, which measures the average return error for notes and bonds maturing in at least a year, approached its highest level for the year on Friday. The two-year range broke above 25 basis points for the third time this year on the day of the Fed meeting.

“This is a unique moment in ten years in capital markets,” said James Camp, director of fixed income at Eagle Asset Management. Correlations are increasing and “the volatility between assets is incredible. We have nowhere to hide.

A weekly survey of Treasury investors by JPMorgan Chase & Co. this week found a historically high level of risk avoidance; neutral positioning was at its highest level since March 2020.

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The surge in yields was led by real or inflation-protected notes and bonds, indicating that tighter financial conditions rather than inflation expectations were the main driver. It was accompanied by sharp declines in US equities which propelled the Standard & Poor’s 500 index to its lowest level in almost a year.

For shorter-dated Treasuries like two- and five-year bonds, surpassing the 2018 highs would mean returning to levels last seen before the 2008 financial crisis. For the benchmark 10-year, its peak of 3 .25% in 2018 was the highest level since 2011.

The two-year yield this week peaked at 2.85%, less than 26 basis points from its 2018 high. The five-year yield hit 3.08%, two basis points above 2018 levels. The 10-year yield’s 19 basis point rise to 3.13%, however, was overshadowed by the 10-year inflation-protected yield’s 27 basis point rise, from just under 0% in the week. previous.

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Real yields on Treasury inflation-protected securities climbed as the Fed’s stance bolstered confidence that consumer price growth rates have peaked. Yields on five-year TIPS rose more than 150 basis points in 40 trading days through May 3, the fastest pace since 2008.

The April CPI report is expected to show an overall decline in the annual pace of inflation to 8.1% from 8.5% in March. For underlying prices, which exclude food and energy, a decline to 6% from 6.5% is expected.

Fed policymakers, in their statement announcing this week’s rate move – the first half-point hike since 2000 – said they were “very attentive to inflation risks”. And while short-term interest rate markets expect the policy rate to rise to 3.25% next year, from the current range of 0.75% to 1%, it is not clear how. their evolution could be influenced by the lagged effects of the tightening on the economy. Already, 30-year fixed mortgage rates in the United States have climbed to 5.27%, their highest level since 2009.

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The latest phase of the sell-off steepened the Treasury yield curve, with long-term rates rising the most – the two-year to 10-year spread widened by more than 17 basis points and reached the level the highest since early March.

The rise in the term premium — offsetting the risk of poor results over a longer period — reflects deep uncertainty about the path of inflation and the Fed’s policy response, Roberto Perli and Benson Durham said. Piper Sandler.

Next week’s auctions may extend the trend as the market tends to seek high coupon rates for new auctions. The 10-year and 30-year are about to collect at least 3% coupons, the first since 2019.

The rise in long-term Treasury yields above 3% “makes them attractive, but they can look a lot more attractive from here,” said George Goncalves, head of US macro strategy at MUFG. “Investors want to be compensated for owning long-term bonds in a world where the Fed can’t really solve the inflation problem with its blunt policy tools.”

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What to watch

Economic Calendar: May 9: Wholesale Stocks May 10: Small Business Optimism NFIB May 11: CPI, MBA Mortgage Claims May 12: PPI, Weekly Unemployment Claims May 13: Import Price Index export, feeling of the U. of MichFed Calendar: May 10: New York Fed President John Williams, Richmond Fed President Thomas Barkin, Cleveland Fed President Loretta Mester, Fed Governor Christopher Waller, Minneapolis Fed President Neel Kashkari, Atlanta Fed President Raphael BosticMay 11: BosticMay 12: San Francisco Fed President Mary DalyMay 13: Minneapolis Fed President Neel Kashkari, MesterAuction Schedule: May 9: 13 and 26 week notes10 May: 3-year notesMay 11: 10-year notesMay 10: 4- and 8-week notes, 30-year bonds

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