Treasury yields fall to 5-month low as investors flee stocks for safe-haven assets

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  • Bond rallied Monday as investors fled the stock market and flocked to safe-haven assets.
  • The drop in the yield highlights a drop in risk appetite among investors as COVID-19 cases increase worldwide.
  • The 10-year yield fell to 1.181% and an intraday low of 1.176% was the lowest since February 11.
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Investors fled into the bond market Monday, pulling the yield on the closely watched 10-year Treasury to its lowest since February, with investors dashing out of equities on fears that rising COVID-19 infections will threaten recovery in the world’s largest economy.

Coronavirus cases have been rising worldwide, led by the Delta variant, pushing the number of infections to nearly 191 million, according to tracking by Johns Hopkins University. Concerns about mounting cases tipped into stocks, pulling the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite from recently set record highs.

The S&P 500 lost more than 2% intraday, and all 11 of the index’s sectors fell, though defensive groups such as consumer staples and health care fared better than most.

With investors fleeing so-called risk assets like stocks, US government bonds rallied and in turn sent the rate on the 10-year yield tumbling by 12 basis points to 1.181%. An intraday print of 1.176% was the lowest rate since February 11. The 10-year yield is tied to a range of loan programs such as mortgage lending.

“The global economy is barely surviving on life support, and another wave of infections may spur lockdowns that could signal the death knell for the tenuous recovery,” and risk aversion was most pronounced in the 10-year yield, said Peter Essele, head of investment management for Commonwealth Financial Network, in a note Monday.

All 50 US states have been reporting higher caseloads and Los Angeles County, the country’s largest, has reverted back to indoor mask mandates, impacting how businesses operate. Meanwhile, the UK posted more than 50,000 new cases for the first time in six months on Friday. In the Asian financial hub of Singapore, new cases have nearly doubled to their highest amount in 11 months.

“Fear of stagflation will be a major concern for investors if a resurgence in COVID infections causes economies to slow while consumer prices continue an upward trajectory,” said Essele.

US consumer prices rose in June, propelling the inflation rate to a higher-than-expected 5.4%, with prices springing higher for used cars, food and energy.

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The Fed could start tapering bond purchases this year, San Francisco Fed President Mary Daly says

Mary Daly Federal Reserve San Francisco
Mary Daly, president of the San Francisco Federal Reserve.

  • The Federal Reserve could start slowing down its asset purchases in 2021, San Francisco Fed President Mary Daly told CNBC on Tuesday.
  • ‘It is appropriate to start talking about tapering,’ in light of recovery in the US economy, Daly said.
  • Daly said the Fed could start curbing purchases later this year or in early 2022.
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The Federal Reserve may begin slowing down asset purchases beginning this year as the world’s largest economy continues to strengthen following the recessionary blow suffered during the coronavirus pandemic, San Francisco Fed President Mary Daly said Tuesday on CNBC.

The central bank has been buying $80 billion worth of Treasury securities and $40 billion in mortgage-backed securities since June 2020 in an effort to help the economy recover from COVID-19 crisis.

“It is appropriate to start talking about tapering asset purchases, taking some of the accommodation that we have been providing to the economy down,” Daly told CNBC in an interview.

“We’ll still be in a very accommodative position with a low funds rate, but we don’t need all the tools we see the economy get its own footing,” she said. Daly didn’t pinpoint an exact timeline but said purchases could be curtailed in late 2021 or early in 2022.

Economic recovery along with a surge in US inflation – and to what extent that it’s transitory – has prompted debate in markets over when the Fed will start pulling back on its asset purchases of $120 billion per month.

On Tuesday, government data showed consumer prices rose 0.9% between May and June, much hotter than a 0.5% rate expected by economists in a Bloomberg survey. The CPI climbed to 5.4% in June from the year-earlier period, the highest rate since August 2008.

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CME wants to lure retail traders to the bond market by offering a simplified futures contract that tracks yields

FILE PHOTO: Men enter the CME Group offices in New York, U.S., October 18, 2017. REUTERS/Brendan McDermid
Men enter the CME Group offices in New York

  • CME Group Inc is introducing four simplified futures contracts that track bond yields.
  • The Micro Treasury Yield futures will rise when Treasury yields increase and fall when they decline.
  • It’s a move from CME, whose customers are typically investment professionals, to capitalize on the boom in retail investing.
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CME Group Inc is attempting to lure retail traders by offering a simplified futures contract that tracks yields. The Micro Treasury Yield futures will rise when Treasury yields increase and fall when they decline.

The contracts will begin trading on Aug. 16 and will come in 2-,5-,10-, and 30-year versions.

It’s a move from CME, whose customers are typically investment professionals, to capitalize on the boom in retail investing. The futures track a simpler metric, rising and falling with yields, rather than looking at the inverse movements of yield and price which can be confusing to those with little experience with fixed income.

The new investment product comes as interest rates remain low while debt in the US balloons. Over the last year, the US budget deficit reached a record $1.9 trillion from October 2020 to April 2021, CME said. At the same time, average daily volume in CME’s US Treasury futures and options grew over 30% year-over-year, which the firm says is a sign of increased hedging and trading activity.

“Our new, smaller yield-based futures are designed for market participants of all sizes who want to gain exposure to, or more precisely hedge against, U.S. Treasury auction issuance,” said Sean Tully, CME global head of financial and OTC products. “These new contracts will complement our existing suite of U.S. Treasury futures and options, and further demonstrate the value of offering cash and futures markets side-by-side.”

Micro 2-Year, Micro 5-Year, Micro 10-Year, and Micro 30-Year Yield futures will be sized at $10 per basis point of yield, and will be cash settled to newly created BrokerTec cash U.S. Treasury benchmarks.

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Investors pull $15 billion from bond funds as rising yields contribute to the biggest weekly outflows in a year

us cash
Rising yields have led to bond-fund outflows.

  • Weekly outflows from bond funds hit $15 billion, the highest amount in about a year, says tracker EPFR.
  • Rising Treasury yields have spurred flight from bond funds while bolstering equity funds.
  • The 10-year Treasury yield spiked beyond 1.6% on Friday.
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A climb in long-dated Treasury yields stoked by US growth expectations has contributed to investors yanking more than $15 billion from bond funds this week, the largest outflow in a year, according to figures released Friday.

Borrowing costs are stepping higher as implied by the 10-year Treasury yield which is tied to a range of loan programs. The pickup in borrowing costs has put pressure on equities, particularly highly valued tech stocks, in recent sessions including on Friday. The 10-year yield was pushed up to 1.639%, its highest in more than a year and the Nasdaq Composite dropped 1.5%.

Yields have increased as investors price in a potential rise in inflation as the US economy recovers from the impact of the COVID-19 pandemic that threw it and other economies into recession last year.

Concerns about US bond yields was a factor in chasing more than $15 billion from bond funds during the week ended March 10, said EPFR, a subsidiary of Informa that provides data on fund flows and asset allocation. The latest outflow was the largest in nearly a year, it said in a note Friday. Bank of America, meanwhile, tallied bond outflows of $15.4 billion.

This week’s bond auctions included the sale of $38 billion in 10-year Treasuries. This week also marked the signing by President Joe Biden of a massive fiscal package under which $1,400 checks will be sent to most Americans.

“While the specter of another wave of US Treasuries hitting the market contributed to the growing angst about global borrowing costs,” wrote Cameron Brandt, director of research at EPFR, “the $1.9 trillion worth of stimulus they will be issued to finance added fresh fuel to the global reflation narrative.”

He said that narrative has “lit a fire” under equity flows. Equity funds tracked by EPFR raked in more than $20 billion for a fifth straight week. That keeps stock-fund inflows on track for a new quarterly record as year-to-date flows “moved within striking distance of the $240 billion mark,” said Brandt.

Brandt also said weekly bond outflows were spurred by the liquidation of funds linked to Greensill Capital, a UK-based supply chain finance company that filed for bankruptcy protection earlier this week.

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The bond market rout has brought the worst start to the year for fixed income investors in 6 years

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  • Bond markets are suffering the worst start to the year since 2015, as investors sell off their debt holdings.
  • The Bloomberg Barclays Multiverse index has lost 1.9% since the end of 2020.
  • Longer-term US Treasuries have lost more than 9% in total return terms.
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Bond investors are witnessing the worst start to the year since 2015, as they sell off their debt on expectations that coronavirus vaccines will successfully aid recovery in the US economy, but lead to higher inflation, the Financial Times reported.

The Bloomberg Barclays Multiverse index, that tracks $70 trillion worth of debt, has dropped 1.9% in value, accounting for price changes and interest payments, since the end of 2020, the FT said.

If sustained at this level, it would mark the bond market’s worst quarterly performance in three years and the sharpest setback to the start of the year since the first quarter of 2015.

Longer-term US Treasuries have lost more than 9% in total return terms, according to a Bloomberg Barclays index of US government bonds.  The 30-year US yield crossed the 2% threshold last reached in the middle of February 2020, reaching a closing point of 2.003%. Yields on 10-year government debt are also rising, having last jumped 1.9% to 1.4% on Wednesday, and even some 5-year yields are moving higher.

Bank of America said this week US yields have already reached its year-ahead target. “This is now realized, but it is over? The biggest risks to current trends include the long-term support levels nearby (yield resistance),” the bank said  in a note on Monday.

Unless there is a sustained surge in inflation, rising bond yields will have a minor impact on stocks, said Richard Saperstein, chief investment officer at Treasury Partners. “Bond yields are rising right now because the market is pricing in the reopening of the economy for the post COVID-19 world and accelerating economic growth,” he said. “Widening credit spreads will likely have a greater impact on P/E’s than rising rates.”

Saperstein expects an inflation spike from March to May, because of economic scarring and elevated levels of unemployment, but does not see a sustained risk in 2021. “My advice for investors is to keep their fixed income durations shorter right now, because the income return is not enough to offset the price declines from rising rates. Any re-investments from fixed income proceeds should be limited to 3-year maturities.”

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