The Charging Bull of Wall Street Bull will be pictured on January 16, 2019 in New York City, Manhattan.
Carlo Allegri | Reuters
The benchmark for ten-year Treasury returns fell to a one-month low on Thursday in a counter-intuitive move that should be positive for the stock market.
Treasury yields, which are moving against the price, have fallen, but it gained momentum after two economic reports early Thursday morning. One was retail sales in March, which rose by almost 10%, and the other was weekly unemployment claims, which fell to 576,000 – the lowest level since the early days of the pandemic.
Strategists said the bond market began to price in a peak for economic growth, which is expected to be as much as 10% this quarter. It also responded to news of possible Japanese purchases in Treasurys, as well as some concerns about Covid.
The yield for ten years dropped to 1.53% before returning to 1.57%. A base point is equal to 0.01 percentage points. The market is closely monitoring the 10-year treasury as it affects mortgage rates and other consumer and business loans.
Thursday’s move in the bond market is the opposite of what might normally be the case.
In general, very good news about the economy would have raised fears that the Federal Reserve would be comfortable raising interest rates, and that yields would remain at higher levels or rise further. Stocks worked with the reports as investors considered it good news.
Andy Brenner, head of international fixed income at National Alliance Securities, said there were a number of reasons for the rise in yields, but he considered it temporary. “I will not change my view of higher returns later in the quarter,” he said. “It’s good for stocks right now.”
Some strategists have said that the bond market may be moving in a period in which it is trading within a range instead of moving to new highs or moving sharply lower.
The relationship between the treasury and the shares
Treasury returns were a source of volatility for equities before this month. The sudden rise in the ten years – from less than 1% at the end of 2020 to a high of 1.77% at the end of March – has shaken the stock market. Investors feared that interest rates would continue to rise and stole investment dollars from equities.
Strategists said the move lower amid strong data is seen as a sign that the market is now looking at the statistics in the rearview mirror.
The returns were higher than expectations for a very strong second quarter and the economy in general. Stimulus spending and the amount of debt required for it also affected the increase in returns.
“Number one, we have high expectations for data … That’s the way the market thinks about it. If it’s strong now, take it from the next one. In the second quarter we’ll get peak data and we’re going to get the best fiscal stimulus spending, “said Jim Caron, head of global macro-strategies in the global fixed-income team at Morgan Stanley Investment Management.
“The third quarter will be strong, but it will be weaker than the second quarter,” he said.
As for the data, “the rate of change is starting to go the other way around. You start saying about 1.7% [10-year yield] is probably not a bad place to grow tall, ‘Caron said.
He said it could mean less volatility, and it would be good for stocks and other assets.
“I think we can enter a range as the treasury market is notorious for doing so. It could fall within a 20 basis point range for months,” Caron said.
Concerns over the pandemic
Brenner of National Alliance Securities said yields are moving lower, concerns about Covid cases and the problems with the Johnson & Johnson vaccine slowing the path to herd immunity.
He said the news about the vaccine, which was interrupted in six patients for blood clots, could raise overall concerns about the safety of vaccines, especially among sections of the population who are already inclined to oppose it.
But Brenner said it’s just one factor. “I think you could get the ten years below the 1.60% level and that caused an acceleration,” he said.
“Bonds are doing better because they see the economy slowing down as much as possible. Stocks are doing better because interest rates are going down and the economic numbers, which are looking backwards, are really good,” Brenner said.
He said hedge funds also pushed returns lower after covering shorts in the range of 1.70% to 1.75%. Another large area for shorts is 1.345%, Brenner added.
He said the 1.47% level should serve as a floor, and strategists note that the 1.50% level is psychological support. But Brenner expects the yield period to be short-lived.
“The Covid goods will catch the flame and the vaccines will go ahead. You had a window through which hedge funds could push the market,” Brenner said.
Ian Lyngen, head of the US interest rate strategy at BMO, said that a report from the Ministry of Finance in Japan is another reason for the purchase in Treasurys.
“If you go to the [Ministry of Finance] data, which came out overnight, we see the week ended April 9, the Japanese bought more than $ 15 billion in overseas notes and bonds. The market assumes that the vast majority of it has been allocated to US Treasuries, ‘he said.
“It also happened at a time when the market was losing steam,” Lyngen said. “We stopped trading strong data in the direction of higher rates. It simply drove rates down.”
Treasurys also passed another test this week with a series of major auctions. The ten-year auction was on Monday. “They bought $ 38 billion at 1.68%,” Brenner said. “You have a profit of 14.5 basis points.”