The Charging Bull or Wall Street Bull is pictured in the Manhattan borough of New York on January 16, 2019.
Carlo Allegri | Reuters
The benchmark yield on 10-year government bonds fell to a monthly low on Thursday, which may not be intuitive for the stock market.
Yields on government bonds, which were moving against the price, had fallen but picked up speed again after two economic reports early on Thursday morning. One was March retail sales, which rose nearly 10%, and the other was weekly unemployment entitlement, which fell to 576,000 – its lowest level since the pandemic began.
Strategists said the bond market is starting to price a high point for economic growth, expected to be up to 10% this quarter. It also responded to news of possible Japanese purchases in Treasurys as well as some concerns about Covid.
The 10-year return fell to 1.53% before falling back to 1.57%. One basis point corresponds to 0.01 percentage points. The market is closely watching the 10-year Treasury Department as it affects mortgage rates and other consumer and business credit.
Thursday’s move in the bond market is the opposite of what could normally be the case.
In general, very good news about the economy would have sparked fears that the Federal Reserve could comfortably raise interest rates and yields could stay at higher levels or continue to rise. Stocks rallied on the reports as investors viewed it as good news.
Andy Brenner, director of international fixed income at National Alliance Securities, said there were a number of reasons for the drop in yields, but he considers it temporary. “I won’t change my mind about higher returns later in the quarter,” he said. “That’s good for stocks for now.”
Some strategists have said that the bond market may be in a phase where it is trading in a range rather than making new highs or trending sharply lower.
Ratio of treasury returns to stocks
Government bond yields were a source of volatility for stocks prior to this month. The abrupt rise over the ten years – from below 1% at the end of 2020 to a high of 1.77% at the end of March – has shaken the stock market. Investors feared interest rates would continue to rise and stole investment dollars from the stocks.
Strategists said the decline in the face of strong data is a sign that the market is now looking at these stats in the rearview mirror.
Returns had risen on expectations for a very strong second quarter and the economy in general. The stimulus spending and the amount of debt that had to be paid for it also affected the rise in yields.
“Number one, we have high expectations for data … that’s what the market thinks. If it’s strong now, it will be carried over by the next. In the second quarter we will have peak data and We will have peak fiscal stimulus spending,” said Jim Caron, head of global macro strategies for Morgan Stanley Investment Management’s global fixed income team.
“The third quarter will be strong, but it will be weaker than the second quarter,” he said.
In terms of the data, “the rate of change is starting to go the other way. You start to say good by 1.7%. [10-year yield] is probably not a bad place to be, “Caron said.
He said it could mean less volatility, and that would be good for stocks and other assets.
“I think we can step into a range as the treasury market is notorious for it. It can be in a range of 20 basis points for months,” said Caron.
The National Alliance Securities burner said part of the reason for the falling returns was concerns over the rise in Covid cases and the problems with that Johnson & Johnson vaccine slows down the path to herd immunity.
He said news of the vaccine, which was suspended in six patients because of blood clots, could raise general concerns about vaccine safety, especially among segments of the population who are already inclined to oppose them.
But Brenner said that was just one factor. “I think you managed to get the 10 years below the 1.60% level and that has accelerated it,” he said.
“Bonds do better because they see the economy as potentially slowing down. Equities do better because interest rates are falling and the backward economic data is really good,” Brenner said.
He said hedge funds also pushed returns after covering short positions in the 1.70% to 1.75% range. Another big range for shorts is 1.345%, added Brenner.
He said the 1.47% level should serve as the lower bound, and strategists note that the 1.50% level is psychological support. However, Brenner assumes that the period of lower returns will be short-lived.
“The Covid stuff is going to pull out and the vaccines are going to do it. They had a window through which hedge funds could drive the market,” Brenner said.
Ian Lyngen, head of US interest rate strategy at BMO, said another reason the Treasury’s buying frenzy was a report from the Japanese Treasury.
“When you look at this [Ministry of Finance] Data released overnight shows the Japanese bought more than $ 15 billion in overseas debt and bonds in the week ending April 9. The market believes the vast majority of this has been allocated to US Treasuries, “he said.
“This also happened at a time when the market was losing bearish steam,” said Lyngen. “We stopped trading strong data in the direction of higher interest rates. That just made interest rates come down.”
Treasurys passed another test this week with a number of large auctions. The 10-year auction was Monday. “They bought $ 38 billion at 1.68%,” said Brenner. “You have a profit of 14.5 basis points.”