Treasury yields retreat after bond market sees largest one-day selloff in weeks
Prices for U.S. Treasurys edged higher Tuesday, pulling yields lower, following the largest one-session selloff in weeks as bond investors reacted to reports of possible shifts in a long-held policy position by Japan’s central bank, which also sent government bond yields in other developed markets jumping.
Yields and bond prices move in opposite direction.
The resurgence of volatility comes after the yield for the benchmark 10-year Treasury note was stuck in a tight range of a few basis points for close to three straight weeks.
See: The bond market is ‘coiling’ for a violent yield surge, says BMO strategist
The 10-year Treasury note yield TMUBMUSD10Y, -0.31% fell1.5 basis points to 2.949%, a day after marking its largest one-day rate jump since June 1 and hitting a six week high. The 30-year bond TMUBMUSD30Y, -0.65% fell 2.4 basis points at 3.077%, following its largest rate climb since May 15 and hitting a roughly six-week rate peak. Meanwhile, the 2-year note yield TMUBMUSD02Y, -0.15% rose by 0.4 basis point to 2.637%, its highest since 2008.
The Japanese 10-year bond yield TMBMKJP-10Y, -1.37% held steady at 0.084% from 0.083% late Monday, after Monday’s move that was its largest one-day climb in about two years, according to WSJ Market Data Group.
Investors took a breather after a back-to-back selloff on Friday and Monday. Losses were spurred by reports that the Bank of Japan may adopt less accommodative monetary policy when it meets on July 30-31, as the central bank has struggled to jolt sluggish inflation toward its 2% target. Ultralow rates in Japan have helped underpin appetite for richer-yielding Treasurys, which in turn has kept U.S. yields in check.
Speculation about Japan’s policy initiative helped to spark a broader selloff of major developed bonds, including U.S. government paper, because it suggests that an era of bond-buying adopted by central bankers across the globe may be nearing an end. The European Central Bank last month signaled that it plans to end its massive bond buying program as early as December.
But The Wall Street Journal later reported that Japan’s central bank is likely to stick to the contours of its current policy at its next meeting, citing people familiar with its thinking. Market participants said without stronger inflation to justify a tweak to monetary policy, the Bank of Japan will stand pat.
Analysts also cited reports of Japanese insurance companies unwinding their holdings of long-dated Treasurys. Combined with thin trading and short positioning, this created the conditions for the outsize moves in the bond market since Friday. The number of bearish bets exceeding bullish bets on 10-year Treasury futures from hedge funds and speculative traders hit close to 470,000 contracts as of July 20, near record levels.
“Yesterday’s bond market selloff (on tales of Japanese life insurers selling amid concerns about BOJ policy shifts) was fueled by lousy summertime liquidity,” said Kit Juckes, chief fixed income and FX strategist at Société Générale.
“With respect to the longer end of the curve, we were reminded the last few days that its direction in yield has a lot to do with what the BOJ and ECB do from here. The latter is more clear, the former not so much. Either way, we’re all in this bond bed together and the driver of yields may have a lot less to do with growth and inflation expectations and more to do with their change of policy. After all, less dominance over the markets is going to have an opposite impact to some extent,” said Peter Boockvar, chief investment officer for the Bleakley Advisory Group.
On the data front, the Markit manufacturing purchasing manufacturers index came in at a reading of 55.5 in July, from 55.4 the previous month. While the services gauge of the Markit PMI report fell to 56.2 in July, from 56.5. But any number above 50 signals growing economic conditions.
The Richmond Fed manufacturing index fell 1 points to a reading of 20 in July, slightly above the consensus estimate of 19 by Econoday.
Investors also digested raft of short-end bond sales. A sale of $35 billion of 2-year notes saw lackluster demand but did not dent trading for Treasurys. Prices for government paper can be sometimes weighed by an influx of fresh debt supply.
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