If bond traders penciled in a week for the 10-year U.S. yield to break through 3 per cent, this probably wouldn’t have been it.
After all, the note’s seven-day losing streak, the longest in a year, has persisted despite the lack of any truly jolting U.S. economic data or fresh supply in the maturity. Sure, purchasing managers’ indexes and new home sales matter, but not enough to fuel a surge through a key level in the world’s borrowing benchmark.
It all boils down to sentiment and momentum -- and both are decidedly bearish. As DoubleLine Capital Chief Investment Officer Jeffrey Gundlach pointed out at an event Tuesday, speculators betting against Treasuries haven’t covered their short positions. Some are buying put options on 10-year futures that protect against yields jumping to 3.15 per cent within a month. And the big question: Where are all the promised buyers?
“The only explanation we’d put on the price action is that the sharp rise in futures open interest could indicate that it’s the systematic/CTA-types who have driven recent trends,” William O’Donnell, managing director at Citigroup Inc., wrote in a note Wednesday, referring to fast-money investors.
No Lies
“We’d like to think that our recent buyers are the ‘strong hands’ among the flows, but prices don’t lie, and right now the sellers clearly have the con,” he said.
The 10-year yield is poised to close above 3 per cent Wednesday for the first time since New Year’s Eve 2013, and for just the second time since 2011. Relative-strength index analysis shows 10-year Treasuries closed Tuesday oversold on a 14-day rolling basis for the first time since Feb. 2. That phenomenon has only grown more entrenched Wednesday.
The next level to watch is 3.0516 per cent, the intraday peak set on Jan. 2, 2014. Investors haven’t had the chance to capture a yield higher than that since 2011.
Strategists at BMO Capital Markets took a stab at identifying support levels above that mark, based on volumes and closing levels from 2011. First there’s 3.135 per cent, then a so-called double top of 3.222 per cent from July of that year.
“One would be hard-pressed to identify this particular period as a time during which a breakout was likely -- which is, in part, what makes the move all the more fascinating,” Ian Lyngen and Aaron Kohli at BMO wrote. “This ostensible lack of incremental impetus leaves the market to trade in a very technical manner.”
TD Securities analysts also point to the potential need for convexity paying tied to mortgage-backed securities as interest rates climb, which could trigger a cycle forcing yields higher. That helps explain heavy purchases of downside options -- the ratio of puts to calls on 10-year Treasuries is running around four-to-one.
Of course, buyers aren’t completely absent. Ten-year futures, for instance, are finding support around the 119 level, which equates to a 3.02-per-cent yield. But the demand hasn’t been enough to reverse the trend.
Among those who have had 3 per cent on their radars: Pacific Investment Management Co.’s Dan Ivascyn and Mark Kiesel, who said on Jan. 31 that they’d “consider buying bonds at that level, getting less defensive.” Robert Tipp and his team at PGIM Fixed Income, who won Morningstar Inc.’s 2017 fixed-income manager of the year award, see 10-year rates topping out around the current mark. Combined, the two firms oversee more than $2-trillion.
By the end of the week, traders will get some more weighty economic data to chew on: namely, first-quarter gross domestic product and a read on employment costs for the period. But for now, the bond bears have wrested control of the Treasury market away from the bulls, and they’re not letting go.