U.S. Treasury yields nudged slightly higher on Tuesday, as market participants await the release of key economic data points later in the week.
At 5:52 a.m. ET, the yield on the benchmark 10-year Treasury note was around 3 basis points higher at 4.128% while the yield on the 30-year Treasury bond was up around 2.9 basis points at 4.345%.
Yields move inversely to prices.
Investors are trying to gauge when the Federal Reserve will begin cutting interest rates, which will be a key determinant of the trajectory for markets and the economy this year.
Two significant pieces of economic data are on the slate this week: a preliminary fourth-quarter GDP growth figure is due on Thursday, followed by the Commerce Department’s closely-watched personal consumption expenditures price index for December on Friday.
Despite the uncertain rate outlook, risk-on sentiment remained robust on Monday, as the Dow Jones Industrial Average and the S&P 500 both notched all-time highs.
“It’s an economy proving to be more resilient than many thought and it’s one that is supported by the prospect of central banks cutting rates, and that’s a great environment for bonds and it’s a great environment for risky assets,” PGIM Principal and Global Investment Strategist Guillermo Felices told CNBC’s “Squawk Box Europe” on Tuesday.
Suze Orman has a warning for investors relying too heavily on bonds.
The personal finance expert believes the draw of high interest rates and an aversion to risk taking are preventing too many people from taking a “lifetime opportunity” in the stock market.
“Some of these stocks — how do you pass them up? I mean, you have to go into them. Now, do you go into them with everything that you have? No. Do you dollar-cost average into them, and take advantage of [down] days? … Yes,” the “Women & Money” podcast host told CNBC’s “Fast Money” this week. “You’ll be making a big mistake if you park your money forever in bonds.”
“I have some serious losers at this point. However, I don’t care,” said Orman. “I want to buy a stock, and I hope it goes down. And I hope it goes further down and down so I can accumulate more.”
She does recommend keeping some money in fixed income to mitigate risks in a volatile environment.
At the same time, she still sees a role for bonds in portfolios. She likes the three– and six-month Treasurys and is ready to start looking longer term.
“The play may start to be in long-term Treasurys. So, I’ve started to dip my toe in. Every time the 30-year [yield] crosses five percent, I buy,” said Orman.
The 30-year Treasury yield is still near 2007 highs. It traded above 5% as of Friday’s close.
Ray Dalio, billionaire and founder of Bridgewater Associates LP, speaks during the Milken Institute Conference
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As concerns mount over rising interest rates and inflation levels, billionaire investor Ray Dalio says he prefers to hold cash for now, not bonds.
“I don’t want to own debt, you know, bonds and those kinds of things,” the founder of Bridgewater Associates said when asked how he would deploy capital in today’s investment environment.
“Temporarily, right now, cash I think is good … and the interest rates are fine. I don’t think [it] will be sustained that way,” Dalio told an audience at the Milken Institute Asia Summit in Singapore on Thursday.
Dalio’s comments come as the yield on the 30-day U.S. Treasury bill climbs above 5% while investors can get 4% on certificates of deposit and high-yield savings accounts.
Dalio says the biggest mistake that most investors make is “believing that markets that performed well are good investments, rather than more expensive.”
When asked how a new industry watcher should deploy capital, Dalio’s advice was: Be in the right geographies, diversify, pay attention to the implications of disruptions and pick asset classes that are creating new technologies and using them “in the best possible way.”
Touching on how to address the rising global debt, the hedge fund manager pointed out that when debt accounts for a substantial share of a country’s economy, the situation “tends to compound and accelerate … because you have to have interest rates that are high enough for the creditor and not so high that they are harming the debtor.”
“We’re at that turning point of acceleration. But the real problem comes when individuals or investors don’t hold the bonds, because it comes as a supply-demand, one man’s debts or another man’s assets,” he explained.
Dalio cautioned that investors will sell their bonds if they are not receiving real interest rates that are high enough.
“The supply-demand [imbalance] isn’t just the amount of new bonds. It’s the issue of ‘do you choose to sell the bonds?’” he explained.
When there’s a sell-off in bonds, prices fall and yields rise, as they have an inverse relationship. As a result, borrowing costs will increase and drive up inflationary pressure, thereby posing an uphill task for central banks.
“When the interest rates go up, the central bank then has to make a choice: Do they let them go up and have the consequences of that, or do they then print money and buy those bonds? And that has inflationary consequences,” Dalio explained.
“We’re seeing that dynamic happen now. I personally believe that the bonds longer term are not a good investment,” he stressed.
U.S. Treasury yields were little changed on Tuesday, as investors continued to assess the outlook for the U.S. economy and digested the latest round of corporate earnings.
As of around 2:20 a.m. ET, the yield on the benchmark 10-year Treasury note was fractionally higher at 3.5946% while the yield on the 30-year Treasury bond also nudged marginally upwards to 3.8080%. Yields move inversely to prices.
Corporate earnings season dominates this week’s agenda, with giants Johnson & Johnson, Bank of America and Goldman Sachs all set to report before the opening bell on Wall Street on Tuesday.
On the data front, traders will have an eye on the March housing starts and building permits figures due at 8:30 a.m. ET. Housing starts for the month are expected to have fallen by 3.4% to 1.40 million units, according to Dow Jones consensus estimates, while building permits are projected to drop by 4.9% to 1.45 million units.
Markets are closely following economic data for a read on where the Federal Reserve might take interest rates at its next meeting in early May. More than 84% of traders are calling a 25 basis point hike at the next policy meeting, according to CME Group’s FedWatch tool.
An auction will be held Tuesday for $34 billion of 52-week Treasury bills.
The central bank caught markets off guard by tweaking its yield curve control (YCC) policy to allow the yield on the 10-year Japanese government bond (JGB) to move 50 basis points either side of its 0% target, up from 25 basis points previously, in a move aimed at cushioning the effects of protracted monetary stimulus measures.
In a policy statement, the BOJ said the move was intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.”
The central bank introduced its yield curve control mechanism in September 2016, with the intention of lifting inflation toward its 2% target after a prolonged period of economic stagnation and ultralow inflation.
The BOJ — an outlier compared with most major central banks — also left its benchmark interest rate unchanged at -0.1% on Tuesday and vowed to significantly increase the rate of its 10-year government bond purchases, retaining its ultra-loose monetary policy stance. In contrast, other central banks around the world are continuing to hike rates and tighten monetary policy aggressively in an effort to rein in sky-high inflation.
The YCC change prompted the yen and bond yields around the world to rise, while stocks in Asia-Pacific tanked. Japan’s Nikkei 225 closed down 2.5% on Tuesday afternoon. The 10-year JGB yield briefly climbed to more than 0.43%, its highest level since 2015.
By midafternoon in Europe, the U.S. dollar was down 3.3% against the surging yen. The yen’s rally saw the currency notch the biggest single-day gain against the U.S. dollar since March 1995 (27 years, eight months, 20 days), according to FactSet currency data.
U.S. Treasury yields spiked, with the 10-year note climbing by around 7 basis points to just below 3.66% and the 30-year bond rising by more than 8 basis points to 3.7078%. Yields move inversely to prices.
Shares in Europe retreated initially, with the pan-European Stoxx 600 shedding 1% in early trade before recovering most of its losses by late morning. European government bonds also sold off, with Germany’s 10-year bund yield up almost 7 basis points to trade at 2.2640%, having slipped from its earlier highs.
“The decision is being read as a sign of testing the water, for a potential withdrawal of the stimulus which has been pumped into the economy to try and prod demand and wake up prices,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“But the Bank is still staying firmly plugged into its bond purchase program, claiming this is just fine tuning, not the start of a reversal of policy.”
That sentiment was echoed by Mizuho Bank, which said in an email Tuesday that the market moves reflect a sudden flurry of bets on a hawkish policy pivot from the BOJ, but argued that the “popular bet does not mean that is the policy reality, or the intended policy perception.”
“Fact is, there is nothing in the fundamental nature of the move or the accompanying communique that challenges our fundamental view that the BoJ will calibrate policy to relieve JPY pressures, but not turn overtly hawkish,” said Vishnu Varathan, head of economics and strategy for the Asia and Oceania Treasury Department at Mizuho.
“For one, there was every effort made to emphasize that policy accommodation is being maintained, whether this was in reference to intended as well as potential step-up in bond purchases or suggesting no further YCC target band expansion (for now).”
The Bank of Japan noted in its statement that since early spring, market volatility around the world had risen, “and this has significantly affected these markets in Japan.”
“The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets,” it added.
The central bank said if these market conditions persisted, it could have a “negative impact on financial conditions such as issuance conditions for corporate bonds.”
Luis Costa, head of CEEMEA strategy at Citi, indicated on Tuesday that the market move may be an overreaction, telling CNBC there was “absolutely nothing stunning” about the BOJ’s decision.
“You have to take this BOJ measure in the context of a positioning in dollar-yen that was obviously not expecting this tweak. It’s a tweak,” he said.
Japanese inflation is projected to come in at 3.7% annually in November, according to a Reuters poll last week — a 40-year high, but still well below the levels seen in comparable Western economies.
Costa said the Bank of Japan’s move was not geared toward combating inflation but addressing the “infrastructure and the dynamics of JGB trading” and the gap in volatility between the trade in JGBs and the rest of the market.
