Bonds: Treasuries

(New York)

Investors need to keep a very sharp eye on the bond market. The yield curve is steepening without any associated rise in economic activity. The reason why has to do with the election. Biden has been rising in the polls, and investors have been increasingly betting he will emerge victorious as part of a blue sweep. If that happens, it is assumed the US would issue a great deal more debt to fund stimulus packages. This means there would be significantly more Treasury bond supply than at present, and potentially calls into question the credit of the US government. As evidence of this trend, the spread between 5- and 30-year Treasuries just hit its largest since 2016.


FINSUM: This is a potential black swan event that no one has seen coming. The election seemed like it would be a dead heat through election day, but if the needle moves more towards Biden, the whole picture for fixed income will change.

(New York)

The bond market is usually ahead of the stock market in predicting and reacting to the economy. It seems to be doing so again. While stocks have had a huge run higher, bond yields have largely been stuck at very low levels. The ultra-low yields of around 0.7% on the ten-year Treasury mean that bond investors see a long, hard, recovery looming and many years of continued aggressive monetary stimulus by the Fed.


FINSUM: Stocks seemed to have gotten a dose of realism over the last two weeks, but yields may be more reflective of the difficulty of the recovery to come.

(New York)

Any investor cannot help but have noticed very unusual movements in markets over the last couple of weeks. In particular, Treasury bonds have been behaving very oddly. After yields predictably plunged alongside stocks a couple of weeks ago, there have been abrupt movements higher, with 10-year yields rising around 90 basis points (from 0.4% to 1.3%) in just a few days. Even now, when yields would presumably be nearing zero, they have been see-sawing and are still near 1%. The reason why appears to be panic-selling in an effort to get cash in any way possibly. In particular, large investors need to meet redemptions in other areas of credit, which are much less liquid, and since getting cash for their holdings there is impossible right now, they are selling Treasury holdings to get the cash to meet redemptions.


FINSUM: This is not unlike selling your valuables to meet mortgage payments. It makes sense, but it is a worrying sign and a symptom of how dire the market has gotten.

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