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Tag: U.S. 30 Year Treasury Bond

  • ‘Eye-popping’ borrowing need from U.S. Treasury raises risk of buyers’ fatigue

    ‘Eye-popping’ borrowing need from U.S. Treasury raises risk of buyers’ fatigue

    Just a day after the Treasury Department released a $1 trillion borrowing estimate for the third quarter, questions are being raised about the extent to which foreign and domestic buyers can continue to keep up their demand for U.S. government debt.

    Further details about Treasury’s financing need will be released at 8:30 a.m. on Wednesday. For now, the $1 trillion estimate, the largest ever for the July-September period, has analysts concluding that the U.S. is facing a deteriorating fiscal deficit outlook and continuing pressure to borrow.

    At stake for the broader fixed-income market is whether the presence of large ongoing auctions over the coming quarter and beyond will lead to a prolonged period where demand from potential buyers might begin to dry up, Treasury yields edge higher, and the government-debt market returns to some form of illiquidity.

    “You can make the argument that since 2020, with the onset of Covid, that Treasury issuances have been met with reasonably good demand,” said Thomas Simons, an economist at Jefferies
    JEF,
    -1.75%    .
    “But as we go forward and further away from that period of time, it’s hard to see where that same flow of dollars can come from. We may be looking at recent history and drawing too much of a conclusion that this borrowing need will be easily met.”

    Simons said in a phone interview Tuesday that “the risk is that you don’t get continued demand from foreign or domestic buyers of fixed income.” The result could be “six to nine months where the market is fatigued by bigger auction sizes, Treasurys become more and more difficult to trade, there’s a grind higher in yields, and there may be issues with liquidity where markets may not be so deep.” Still, he expects such a period, if there is one, to be less acute than what was seen in the 2013 taper tantrum or last year’s volatility in the U.K. bond market.

    On Monday, the Treasury revealed a $1.007 trillion third-quarter borrowing estimate that was $274 billion higher than what it had expected in May. The estimate — which Simons calls “eye-popping” — assumes an end-of-September cash balance of $650 billion, and has gone up partly because of projections for lower receipts and higher outlays, according to Treasury officials.

    Monday’s estimate is the largest ever for the third quarter, though not relative to other parts of the year. In May 2020, a few months after the onset of the COVID-19 pandemic in the U.S., Treasury gave an almost $3 trillion borrowing estimate for the April-June quarter of that year.

    For the upcoming fourth quarter, Treasury is now expecting to borrow $852 billion in privately-held net marketable debt, assuming an end-of-December cash balance of $750 billion. According to strategist Jay Barry and others at JPMorgan Chase & Co.
    JPM,
    -1.05%    ,
    the third- and fourth-quarter estimates “suggest that, at face value, Treasury continues to expect a wider budget deficit” for the 2023 fiscal year.

    As of Tuesday, investors appeared to be less focused on the Treasury’s borrowing needs than on signs of continued strength in the U.S. labor market, which raises the prospect of higher-for-longer interest rates. One-
    TMUBMUSD01Y,
    5.400%
    through 30-year Treasury yields
    TMUBMUSD30Y,
    4.100%
    were all higher as data showed demand for workers is still strong. Meanwhile, all three major U.S. stock indexes
    DJIA,
    +0.05%

    SPX,
    -0.33%

    COMP,
    -0.41%
    were mostly lower in morning trading.

    According to Simons, who the most likely buyers will be at Treasury’s upcoming auctions will depend on where the department decides to focus its issuances. If the focus is on bills, then money-market mutual funds could “move some cash over,” he said. And if it’s on long-duration coupons, it would be “real money” players such as insurers, pension funds, hedge funds and bond funds — though much will rely on inflows from clients “before demand would pick up.”

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  • Stocks are on a seemingly unstoppable hot streak, but this bond-market ‘tipping point’ could see it end in a hurry

    Stocks are on a seemingly unstoppable hot streak, but this bond-market ‘tipping point’ could see it end in a hurry

    The S&P 500 index is on the verge of a fifth straight monthly gain in July. It’s a reality that few on Wall Street expected just eight months ago.

    As a result, it seems that one by one, equity analysts at the big banks are issuing mea culpas or tweaking their S&P 500 targets.

    With so many reconsidering their assumptions about markets and the economy, one analyst who has been bullish for months sees an opportunity to reflect on what Wall Street got wrong in 2023 — and by doing so, pinpoint potential existential threats to the rally that may lie ahead.

    Jawad Mian, a longtime financial markets professional and the founder of Stray Reflections, said professional investors and economists generally underestimated just how resilient U.S. corporations, and U.S. consumers, and the broader U.S. economy would be to higher interest rates. At the same time, they failed to fully appreciate inflation’s ability to boost corporate profits over the long term.

    So far, stocks have proved resilient to higher bond yields in 2023, but that doesn’t mean they always will be. Mian believes that rising real yields could eventually push past a “tipping point” that would send U.S. equity valuations sharply lower.

    “I think what’s happening is we are collectively discovering how high interest rates can go before the economy breaks,” he said.

    “I think the 10-year yield is heading toward 5%. But the nuanced take here is the path higher is not troublesome…however, at some point, we’ll reach a level that’s too much,” Mian added during a phone interview with MarketWatch.

    The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.962%
    stood at 3.955% on Friday.

    Past the point of no return

    The Federal Reserve pushed its policy interest-rate to its highest level in 22 years earlier this week, and further hikes certainly could push long-dated bond yields higher, Mian said. But the blow that drives markets over the cliff could easily come from somewhere else as well.

    For example: Foreign investors, particularly those in Japan, could choose to dump U.S. Treasurys now that they’re being enticed by more attractive yields back home.

    Investors received a small taste of what this might look like on Thursday afternoon when a headline about the Bank of Japan’s plans to loosen its grip on its government bond market sent the yield on the 30-year Treasury bond
    TMUBMUSD30Y,
    4.021%
    north of 4%, sparking a selloff in stocks that led to the Dow Jones Industrial Average snapping a 13-day winning streak.

    Yields on the 10-year Japanese government bond hit their highest levels since 2014 on Friday after the BOJ confirmed those reports during its July policy meeting.

    See: Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak

    Corporate earnings are another puzzle

    While it’s important for investors to monitor bond-market threats like this, yields don’t exist in a vacuum. Corporate earnings are another important piece of the puzzle.

    Higher yields make bonds more attractive to investors, helping to dim the appeal of stocks, but they also increase borrowing costs for corporations, potentially cutting into profits and pushing companies to lay off employees or enact other belt-tightening measures.

    The more pressure companies face from rising borrowing costs, they more likely they’ll need to take more cost-cutting measures like laying off employees.

    “Generally speaking, if yields move higher that should put downward pressure on multiples. That’s a risk to the stock market for sure,” said James St. Aubin, chief investment officer for Sierra Investment Management, during a phone interview with MarketWatch.

    For now at least, it looks like stocks could continue to ride this wave of momentum higher, even if valuations are looking somewhat stretched relative to recent history already, St. Aubin said. For this to continue though, corporate earnings will need to keep pace with increasingly optimistic expectations.

    Already, stock valuations are looking lofty based on the price-to-earnings ratio, one of Wall Street’s favorite metrics for determining how expensive or cheap the market looks.

    The forward 12-month price-to-earnings ratio for the S&P 500 index currently stands at 19.4. That’s already higher than the five-year average of 18.6, and the 10-year average of 17.4, according to FactSet data.

    Right now, investors are willing to tolerate this because they expect corporate profits to grow substantially in the years ahead, even though profits are expected to contract by 7% in the quarter ended in June, bringing the stretch of negative earnings growth to a third straight quarter.

    But in 2024, year-over-year earnings growth is expected to swell to 12.6%. If companies meet, or surpass, these expectations, stocks will likely hold on to their gains, if not continue to climb, St. Aubin said.

    However, should earnings growth disappoint, a painful market reckoning might follow.

    Since the start of 2023, U.S. stocks have nearly erased all of their losses from 2022, which was the worst year for stock-market performance since 2008, while bonds saw their biggest declines in decades as yields soared driven by inflation and the Federal Reserve’s aggressive interest-rate hikes. Since Jan. 1, the S&P 500
    SPX,
    +0.99%
    has risen 19.3% to 4,582.23, according to FactSet.

    The Nasdaq Composite
    COMP,
    +1.90%
    has risen 36.8% to 14,316, while the Dow Jones Industrial Average
    DJIA,
    +0.50%
    is up 7%.

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  • What’s at stake for stock and bond investors in second half of 2023

    What’s at stake for stock and bond investors in second half of 2023

    There’s a lot riding for stock and bond investors in the second half of the year, with the biggest question centered around whether the idea of “immaculate disinflation” can come fully to fruition.

    The term refers to the notion that inflation might meaningfully dissipate from here, without a significant uptick in U.S. unemployment or a major recession. It’s considered to be the perfect scenario for investors and policy makers, who want inflation back down to their 2% target, and one in which the Federal Reserve’s main policy rate target wouldn’t need to go much higher from its current level between 5%-5.25%.

    What makes the path ahead so tricky is that core readings that represent the purest reads on inflation are proving to be stubborn and it isn’t clear whether they’ll turn meaningfully lower, fast. If they don’t, that would likely put pressure on central bankers to keep up their inflation fight and has the potential to drive up interest-rate expectations, as well as Treasury yields. Though the bond market has come around to the fact there won’t likely be any rate cuts by the Fed soon, it still isn’t completely on board with the idea of higher rates for longer — which, in turn, is helping to support equities for now.

    “The problem for the disinflation people or believers is that the core readings continue to come in too high,” said Jeffrey Cleveland, director and chief economist at Payden & Rygel, a Los Angeles-based investment management firm that oversees $148.9 billion in assets.

    Friday’s core reading from the Fed’s favorite inflation gauge — known as the PCE — was 0.3% for the month of May, and has been at or above that mark for six straight months.

    Via phone, Cleveland said his firm expects the monthly core PCE reading to end the year above 0.3%, but “you need monthly core PCE readings to be 0.1% or 0.2% to see meaningful disinflation.” If inflation surprises to the upside, “the whole Treasury curve moves up, with the 2-year rate most susceptible,” which would likely dent the performance of stocks.

    Cleveland said he expects the policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y to get back to 5% by December — a level that was last seen in March.

    The first six months of this year have turned out to be great for U.S. equities, with the Nasdaq-100
    NDX,
    +1.63%
    on track for its best first-half performance on record, as investors came around to the idea that the economy is resilient enough to absorb higher rates. The unemployment rate stood at 3.7% as of May as the U.S. added a shockingly large number of jobs, while annual core readings from the consumer-price index and PCE index came in at 5.3% and 4.6%, respectively, for May.

    Read: How stocks and every other major asset have performed in first half of 2023 — and over the last 18 months

    Meanwhile, the benchmark 10-year yield
    TMUBMUSD10Y,
    3.812%    ,
    which reflects investors’ long-term U.S. outlook, has remained relatively contained near 3.75% for months as robust U.S. data rolled in, accompanied by signs of overall inflation easing when waning gas and food prices are factored in.

    Data released this week reaffirmed that the U.S. economy and labor market are holding up, despite 5 percentage points of Fed rate hikes since March 2022. With policy makers signaling two more hikes may be on the way starting in July, the risk is that the economy continues to prove resistant to policy makers’ actions and requires even more tightening.

    “Not only is the U.S. economy continuing to prove resilient in the face of significantly tighter monetary policy, but it also appears the starting point of the economy for 2023 was even higher than previously anticipated with the consumer proving to be an even stronger force across the first three months,” said Stifel, Nicolaus & Co. economists Lindsey Piegza and Lauren Henderson, in a note this week. 

    Via phone, Henderson said her Chicago-based firm isn’t buying into the “immaculate disinflation” theory yet and thinks inflation “is proving stickier and more persistent than many expected.”

    Stifel, which updates its forecasts on a quarterly basis, is standing by its year-end expectations for the 2- and 10-year Treasury yields
    TMUBMUSD10Y,
    3.812%
    to be at 4.65% and 3.45%, respectively, she said. That’s below the current levels for those rates because Stifel economists foresee a short, shallow recession “sometime in the fourth quarter or beyond,” as policy makers push the fed-funds rate target up to 5.75% by year-end and stay there through 2024, according to Henderson.

    Inside the market for fixings, or derivatives-like instruments in which bets can be made on upcoming consumer-price index reports, traders have been coalescing around the view that the annual headline CPI rate is likely to start falling toward 2% this year. They even see the core CPI reading dropping to roughly 2.5% annually and to 0.2% monthly, in relatively quick fashion.

    However, one big name has a warning. Former New York Fed President Bill Dudley said inflation could easily go higher than his estimated 2.5% long-term average, and that the 10-year Treasury yield might even go above his “conservative” estimate of 4.5%.

    On Friday, financial markets were focused on the positive aspects of the PCE report, with all three major U.S. stock indexes
    DJIA,
    +0.97%

    SPX,
    +1.31%

    COMP,
    +1.49%
    higher in afternoon trading. Meanwhile, 3-month
    TMUBMUSD03M,
    5.320%
    through 30-year Treasury yields
    TMUBMUSD30Y,
    3.854%
    all moved lower.

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  • U.S. stocks fall on last trading day of 2022, booking monthly losses and worst year since 2008

    U.S. stocks fall on last trading day of 2022, booking monthly losses and worst year since 2008

    U.S. stocks ended lower Friday, booking their worst annual losses since 2008, as tax-loss harvesting along with anxieties about the outlook for corporate profits and the U.S. consumer took their toll.

    How stock indexes traded
    • The Dow Jones Industrial Average
      DJIA,
      -0.22%
      slipped 73.55 points, or 0.2%, to 33,147.25.

    • The S&P 500
      SPX,
      -0.25%
      shed 9.78 points, or 0.3%, to 3,839.50.

    • The Nasdaq Composite dipped 11.61 points, or 0.1%, to 10,466.48.

    For the week, the Dow fell 0.2%, the S&P 500 slipped 0.1% and the Nasdaq slid 0.3%. The S&P 500 dropped for a fourth straight week, its longest losing streak since May, according to Dow Jones Market Data.

    All three major benchmarks suffered their worst year since 2008 based on percentage declines. The Dow dropped 8.8% in 2022, while the S&P 500 tumbled 19.4% and the technology-heavy Nasdaq plunged 33.1%.

    What drove markets

    U.S. stocks fell Friday, closing out the last trading session of 2022 with weekly and monthly losses.

    Stocks and bonds have been crushed this year as the Federal Reserve raised its benchmark interest rate more aggressively than many had expected as it sought to crush the worst inflation in four decades. The S&P 500 ended 2022 with a loss of 19.4%, its worst annual performance since 2008 as the index snapped a three-year win streak, according to Dow Jones Market Data.

    “Investors have been on edge,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, in a phone interview Friday. “It seems as though the ability to drive down prices is probably a bit easier given just how crummy the year’s been.”

    Stock indexes have slumped in recent weeks as hopes for a Fed policy pivot faded after the central bank in December signaled that it would likely wait until 2024 to cut interest rates.

    On the final day of the trading year, markets were also being hit by selling to lock in losses that can be written off of tax bills, a practice known as tax-loss harvesting, according to Kim Forrest, chief investment officer at Bokeh Capital Partners.

    An uncertain outlook for 2023 was also taking its toll, as investors fretted about the strength of corporate profits, the economy and the U.S. consumer with fourth-quarter earnings season looming early next year, Forrest said.

    “I think the Fed, and then earnings in the middle of January — those are going to set the tone for the next six months. Until then, it’s anybody’s guess,” she added.

    The U.S. central bank has raised its benchmark rate by more than four percentage points since the beginning of the year, driving borrowing costs to their highest levels since 2007.

    The timing of the Fed’s first interest rate cut will likely have a major impact on markets, according to Forrest, but the outlook remains uncertain, even as the Fed has tried to signal that it plans to keep rates higher for longer.

    On the economic data front, the Chicago PMI for December, the last major data release of the year, came in stronger than expected, climbing to 44.9 from 37.2 a month prior. Readings below 50 indicate contraction territory.

    Next year, “we’re more likely to shift towards fears around economic growth as opposed to inflation,” said Heppenstall. “I think the decline in growth will eventually lead to a more meaningful decline in inflation.”

    Read: Stock-market investors face 3 recession scenarios in 2023

    Eric Sterner, CIO of Apollon Wealth Management, said in a phone interview Friday that he’s expecting the U.S. could fall into a recession next year and that the stock market could see a new bottom as companies potentially revise their earnings lower. “I think earnings expectations for 2023 are still too high,” he said.

    The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite booked modest weekly declines, adding to their December losses. For the month, the Dow fell 4.2%, while the S&P 500 dropped 5.9% and the Nasdaq sank 8.7%, FactSet data show.

    Read: Value stocks trounce growth equities in 2022 by historically wide margin

    As for bonds, the U.S. Treasury market was set to record its worst year since at least the 1970s.

    The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.879%
    has jumped 2.330 percentage points this year to 3.826%, its largest annual gain on record based on data going back to 1977, according to Dow Jones Market Data.

    Two-year Treasury yields
    TMUBMUSD02Y,
    4.423%
    soared 3.669 percentage points in 2022 to 4.399%, while the 30-year yield
    TMUBMUSD30Y,
    3.971%
    jumped 2.046 percentage points to end the year at 3.934%. That marked the largest calendar-year increases ever for each based on data going back to 1973, according to Dow Jones Market Data.

    Outside the U.S., European stocks capped off their biggest percentage drop for a calendar year since 2018, with the Stoxx Europe 600
    SXXP,
    -1.27%    ,
    an index of euro-denominated shares, falling 12.9%, according to Dow Jones Market Data.

    Read: Slumping U.S. stock market lags these international ETFs as 2022 comes to an end

    Companies in focus

    —Steve Goldstein contributed to this article.

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  • Treasury yields climb as U.S. unemployment drops and wage growth remains strong

    Treasury yields climb as U.S. unemployment drops and wage growth remains strong

    Treasury yields rose Friday after the U.S. September payrolls report showed a surprise decline in unemployment as well as strong growth in wages, making a pivot in Fed policy less likely.

    What’s happening
    What’s driving markets

    The U.S. created 263,000 nonfarm jobs in September — roughly in line with expectations — with the unemployment rate falling to 3.5% from 3.7%, while the year-over-year growth rate in hourly wages was 5%.

    The unemployment decline was a surprise to economists who had anticipated a steady jobless picture.

    Federal Reserve Gov. Christopher Waller late on Thursday said he didn’t expect the jobs report to change anyone’s thinking at the central bank. New York Fed President John Williams will have the opportunity to comment on the data when he speaks at 10 a.m. Eastern.

    Ahead of the release, strategists at ING said the price action this week suggests the market has moved away from the early Fed policy pivot idea. “We may well have seen the structural top at 4% for the 10 year, or thereabouts, but we also feel we’re liable to see it at least one more time. There is a large fall in market rates to come, but we’re not at that point just yet,” they added.

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