Investors look for answers as Treasuries rally after strong economic data
NEW YORK (Reuters) – A sharp drop in Treasury yields in the face of strong U.S. economic data is surprising market participants who expected the reflation-driven bond selloff of the first quarter to continue.
U.S. Treasury yields notched their biggest drop since Nov. 12 on Thursday, even as March retail sales data came in much better than expected and jobless claims fell.
Normally, strong data would bolster the case for economic recovery and inflation, diminishing the attractiveness of bonds and pushing yields higher.
All told, the yield on the benchmark 10-year U.S. Treasury has fallen nearly 20 basis points in April, reversing some of the dramatic rise in February and March and boosting a rally in growth and technology shares that has helped send markets to fresh records. The 10-year yield fell to a one-month low of 1.528% on Thursday.
“Certainly the move in Treasuries today was counter to expectations,” said Justin Hoogendoorn, managing director at Piper Sandler. “With the surge in retail sales of 9.8% in March, a selloff seemed inevitable.”
Investors gave a broad range of reasons for the move, including an unwind of bearish bets against Treasuries, safe-haven buying in the face of heightened tensions between Russia and Ukraine and increased appetite for U.S. debt among foreign buyers.
John Briggs, global head of desk strategy at NatWest Markets, believes some investors may have already factored in a powerful economic rebound, accounting for the climb in yields earlier in the year.
“The market has generally priced in that the U.S. is accelerating more quickly than originally expected,” he said. “We’ve now gotten to a point where there’s some stability from the sell-off and you’re going to see some appetite coming back into the market.”
Speculators trimmed their net bearish bets on U.S. 30-year Treasury bond futures in the week to April 6. Their net position on the U.S. 10-year notes flipped from a net short to a net long, the data showed.
“That is somewhat telling of how it’s not necessarily economic data that is driving this … It’s more positioning and expected change in terms of buyer base,” said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston.
Nomura macro and quant strategist Masanari Takada recently noted a “course correction” away from bear trades in the Treasury market.
“According to the estimates output by our team’s model, it seems likely that fundamentals-oriented global macro hedge funds have already closed out the entirety of their aggregate net short position in USTs, and may have swung to the net long side,” Takada said in a note on Tuesday.
Rising tensions between the United States, Russia and China could also be bringing some buyers back into the Treasury market as a safe haven given the outsized rally in equities over the past six months, said Scott Kimball, co-head of U.S. fixed income at BMO.
“Geopolitical risks are mounting, the income gap between net savers and those living paycheck to paycheck are continuing to grow, and the fiscal stimulus has been too late or at least behind the curve,” he said.
Some investors have also pointed to greater demand from foreign investors, including Japanese buyers. April 1 marked the start of a new fiscal year in Japan, ending a period of portfolio readjustment in which investors sold off Treasuries.
The previous move higher in rates at the beginning of the year is also likely attracting buyers enticed by higher returns, said Robert Sears, chief investment officer at Capital Generation Partners.
“In this yield-starved world, rates don’t have to go up that much for the trade to become appealing,” he said.
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