Bond Yields retreat, Treasury bills flirt with negative rates
U.S. Treasury yields eased on Friday from more than one-year highs, while the shortest end of the market flirted with negative rate territory as it tried to absorb a flood of cash from the nation’s massive fiscal stimulus package.
The benchmark 10-year note yield was last down less than a basis point at 1.7264%. On Thursday, it soared to 1.7540%, a level not hit since January 2020 before the coronavirus pandemic sent yields and stocks crashing. The 30-year bond yield also retreated after reaching 2.518% on Thursday, its highest since August 2019. It was last 3.3 basis points lower at 2.4429%.
The market largely shrugged off the Federal Reserve’s announcement on Friday that it would let a temporary bank leverage rule exemption expire on March 31. Meanwhile, dealers offered to sell Treasury bills due in three months or less at negative rates, according to market sources. Tradeweb reported that while bid yields for those bills did not go negative, a few on the ask side did hit “very marginal negative points this week.”
Tom Simons, money market economist at Jefferies in New York, said bill yields were flirting with negative rates, which were last seen in March 2020. “When things are very cuspy, where bills are basically trading at zero, occasionally a quote will pop up where it’s actually negative for a minute or two, but it doesn’t really trade there or doesn’t really get captured on the recap data,” he said.
This week’s yield spike on the longer end of the curve was fueled by the Fed policy meeting, which boosted economic growth expectations for 2021. Fed Chair Jerome Powell on Wednesday repeated pledges to hold interest rates steady in an effort to keep economic recovery on track even if inflation breached the central bank’s 2% target this year.
The pullback in yields was not too surprising, according to Ryan Swift, U.S. bond strategist at BCA Research in Montreal. “Ultimately, what we’re seeing now is a great deal of tension between market prices that embed several rate hikes before the end of 2023 and the Fed’s forecast that doesn’t expect liftoff until 2024,” he said, adding that the conflicting rate forecasts will lead to market volatility.
Richmond Federal Reserve Bank President Thomas Barkin told CNBC on Friday that the central bank will not raise short-term rates until the economy meets clear benchmarks. Some major bond managers raised concern that the market could be viewed as disorderly if the recent pace of yield increases that has seen the 10-year rise 80 basis points since January continues. BofA on Friday revised its end-of-year target for the 10-year yield to 2.15% from 1.75%.
The Fed’s announcement on the expiration of the leverage rule exemption, put in place in April 2020 to ease stress in the Treasury market due to the pandemic, means banks will have to resume holding an extra layer of loss-absorbing capital against their U.S. Treasuries and central bank deposits.
Justin Lederer, Treasury analyst at Cantor Fitzgerald in New York, said the Fed’s move had already been priced into the market. “Dealer Treasury holdings have fallen off sharply over the
last few weeks, so I think it already took place,” he said. “The actual headline was just noise.” Looking ahead to next week, the Treasury will offer $60 billion of two-year notes on Tuesday, $61 billion of five-year notes on Wednesday, and $62 billion of seven-year notes on Thursday. Lederer said the five- and seven-year note auctions could be tone setters for the market in terms of participation from non-dealers. “That could be a sign of whether we hit levels that are supportive if you see some decent sponsorship,” he said.
The two-year Treasury yield, which typically moves in step with interest rate expectations, was last down 1.2 basis points at 0.1472%. A closely watched part of the yield curve, which measures
the gap between yields on two- and 10-year Treasury notes , was 2.63 basis points steeper from Thursday’s close at 157.38 basis points.
