NEW YORK (Reuters) – The recent pace of rising yields in the U.S. Treasury market has been unsettling, according to several top bond fund managers who fear the market could be seen as messy if the pace of the ascents continues.
Managers also mentioned some issues with liquidity, as yields have moved higher, with the yield on 10-year Treasuries down 80 basis points since January. It hit a 14-month high of 1,754% this week, fueled by the Federal Reserve’s commitment to keeping monetary policy loose, boosting economic growth and inflation.
Some analysts have compared the increase in yields to the “taper tantrum” of 2013, when 10-year yields rose 136 basis points to 3.06%, according to Rabobank.
“This is not a market for the math and bond market experts,” said Gregory Peters, director of strategy and multi-industry at PGIM Fixed Income. “It is not so much the increase in interest rates as the volatility and speed that is disturbing. There is real momentum around him. “
Peters, who initially estimated that the 10-year yield would deviate in a range of 1.25-1.5% this year, said there was a “momentum to raise rates here from a markets’ perspective. way that I underestimated. “
Yields have skyrocketed beyond market expectations. A Reuters poll of more than 60 strategists in December showed they expected the performance of the US benchmark to rise as much as 1.2% in the next 12 months.
“(The 10-year yield) could go as high as 2% and right now it’s just a few trading days,” said Gregory Whiteley, DoubleLine’s portfolio manager.
Until now, Fed Chairman Jerome Powell has ignored concerns that the recent surge in US Treasury yields could spell trouble for the central bank’s extended loose monetary policy. But a rapid upward move, which can drive up borrowing costs for businesses and consumers, could eventually force them to reconsider, Whiteley said.
“A rate hike that continues at the rate we’ve seen in the last six weeks will come to be seen at some point as a messy market that needs a response from the Fed,” Whiteley said.
Bond managers attributed some of the force behind the move to speculators who are significantly short in longer-term Treasury futures, according to recent data from the US Commodity Futures Trading Commission.
“The momentum right now is in the hands of shorts,” said Andrew Brenner, head of international fixed income at the National Alliance, describing them as “bond vigilantes” – investors selling debt holdings to pressure central banks to that they change the monetary policy that they see. as an inflationist.
Bond managers also cited poor liquidity and price dislocations as recurring problems in the market.
Although the Treasury market is historically the deepest and most liquid in the world, demand for Treasuries has been unstable as the supply of new debt has increased to pay for the COVID-19 stimulus measures.
The bid-ask spread on the 10-year Treasury note, a liquidity measure that shows the difference between offered and accepted offers, reached its widest level since February 26 on Thursday, a day after a weak auction for debt that sent the debt to 10 years. yield 20 basis points more.
The Treasury market faced a liquidity crisis in March 2020 as the coronavirus was taking hold in the United States, until the Fed stepped in to support the market.
“All the structural factors that contributed to the tight liquidity that resulted in price dislocations in March are still in play. And that’s contributing to the market overshoot, “said Tiffany Wilding, a North American economist at bond giant PIMCO.
Reporting by Kate Duguid; Edited by Megan Davies and Lincoln Feast.