- Wikimedia Commons
US Treasury yields are firming yet again on Tuesday, rising for the third time in four sessions.
Sellers have been in control since Thursday’s European Central Bank meeting, which failed to see the extension of the central bank’s quantitative-easing program. That, coupled with event risk ahead of the September 21 decision by the Federal Reserve, has some speculating that the world’s largest central banks are turning a bit more hawkish.
Selling into midday has US Treasury yields higher by 7 basis points at the long end of the curve, running the 10-year yield up to 1.73%, its highest since the day the UK voted to exit the European Union. Additionally, the selling has swung the yield curve steeper, with the two-year/10-year spread widening to 93 basis points.
And the move higher in yields might not be over just yet. That’s according to a note from Credit Suisse’s fixed-income research team led by Praveen Korapaty. In a note to clients sent out on Monday, the group pointed to a few reasons yields could move even higher.
First, the market is pricing in a more hawkish Fed, with the rhetoric by Janet Yellen and Stanley Fischer followed up by numerous other Fed officials. And while Fed Gov. Lael Brainard was in the dovish camp on Monday, the market, as priced by the one-year/one-month overnight indexed swap, is at its highest level since the end of May.
Maybe more important, the absence of foreign buying is notable as the stock of negative-yielding bonds shrinks. The recent sell-off in sovereign debt markets around the world has lifted yields in Europe and Japan out of negative territory. The German 10-year is up to 6.5 basis points after hitting roughly -20 basis points back in July, and the Japanese 10-year is up to -2.3 basis points after touching -30.
- Credit Suisse
And while there is still a ton of negative-yielding debt, the sell-off has caused foreign investors, who have been gobbling up Treasurys because of interest-rate differentials, to scale back their purchases. Exacerbating this is the fact that it has become more expensive for foreign investors to hedge their purchases because of “the increased premium placed on dollar funding (evidenced in the cross- currency basis swap market) as well as the slight increase in pricing for the near-term potential of further policy rate divergence,” Credit Suisse says.
- Credit Suisse
Additionally, there tends to be a heavy calendar of corporate bond offerings in September, causing a logjam of supply in the marketplace. Credit Suisse notes that in just the first week of September alone, $51 billion in high-grade corporate supply found its way onto the market, making for “one of the highest issuance weeks on record.”
While the team says a September hike is unlikely, it believes such an event would cause the front end of the curve to rally another 15 to 20 basis points, with the long end “rising by a similar amount to be less than or equal to the front-end sell-off.”