Photographer: Sarinya Pinngam / EyeEm / Getty Images
Photographer: Sarinya Pinngam / EyeEm / Getty Images
It is not only in meme stocks that the fate of short sellers is an important theme. Short bets are increasingly in vogue in the $ 21 trillion treasury market, with significant implications for asset classes.
The standard ten-year yield reached 1.62% on Friday – the highest since February 2020 – previously dip buying from foreign investors emerged. Stronger-than-expected job creation and Federal Reserve Chairman Jerome Powell looks lack of concern, for now, with the jumping long-term borrowing costs has encouraged traders. In one sign of which direction they are leaning, claim to Borrowing 10-year loans in the market for the repurchase agreement is so large that the rates have become negative, probably part of the step of shortening the term.
The trifects of more fiscal stimulus ahead, extremely easy monetary policy and a rapid vaccination campaign are helping to target a post-pandemic reality. There are, of course, risks to the clumsy bond scenario. Most importantly, returns can rise to such an extent that they mock stocks and aggravate financial conditions in general – a key measure the Fed is targeting to guide policy. Nevertheless, Wall Street analysts do not appear to be doing so increase the annual forecast forecasts fast enough.
“A lot of fuel is now being put on this fire for higher returns,” says Margaret Kerins, global head of fixed-income strategy at BMO Capital Markets. ‘The question is what the point is that higher returns are too high and that it really puts pressure on risk assets and puts Powell into action’ to try to evaporate it.
Stock prices have already shown signs of vulnerability to rising returns, especially technology-heavy stocks. Another area at risk is the housing market – a bright spot for the economy – with mortgage rates jump.
The increase in yields and growing confidence in the economic recovery have led a number of analysts to recalibrate expectations for ten-year rates over the past week. For example, TD Securities and Societe Generale increased their year-end forecasts to 1.45% and 1.50% respectively.
Asset managers, in turn, the latest data from 10 years since 2016, the latest commodity futures trading commission showed.
Auction pressure
In the coming days, however, BMO sees 1.75% as the next key point, a level last seen in January 2020, weeks before the pandemic sent markets into a chaotic frenzy.
A fresh dose of long-term supply next week could make short positions even more attractive, especially afterwards a record low demand for the 7-month auction last month, was a booster for the ten-year yield to more than 1.6%. The Treasury will sell a total of $ 62 billion in debt in thirty-ten years.
With the expectation of inflation and flying growth, traders are signaling that they expect the Fed may have to react faster than indicated. Eurodollar futures now reflect a quarter-point increase in the first quarter of 2023, but they are starting to signal that it may come at the end of 2022. Fed officials predicted they would keep the rates until at least the end of 2023.
Thus, as the market tends to higher returns, the interaction between bonds and equities is likely to be a major focus going forward.
“There is definitely momentum, but the question is how well risky assets adapt to the new paradigm,” said Subadra Rajappa, head of Societe Generale’s US rate strategy. “We will see next week when the dust will settle on the payroll data, how treasury responds and how risky assets respond to the rise in returns.”
What to watch
- The economic calendar
- March 8: Wholesale sales / inventory
- March 9: NFIB Small Business Optimism
- March 10: MBA Mortgage Applications; VPI; average weekly earnings; monthly budget statement
- March 11: Unemployed claims; Comfort of the longer; JOLTS jobs: household change in net worth
- March 12: PPI; Sentiment from the University of Michigan
- The Fed calendar is empty before the March 17 policy decision
- The auction calendar:
- March 8: 13-, 26-week accounts
- March 9: accounts for 42 days of cash management; 3-year notes
- March 10: 10-year notes
- March 11: accounts of 4-, 8 weeks; 30-year bonds
– With the help of Edward Bolingbroke and Alex Harris