Nov 12, 2019

Treasury selloff is more about the Fed than the trade deal

Dion Rabouin, author of Markets

Photo: Alastair Pike/AFP/Getty Images

The U.S. bond market was closed on Monday to commemorate Veterans Day, pausing a massive selloff in U.S. Treasuries that has taken yields on the benchmark 10-year Treasury note to their highest level since the start of August.

Why it matters: The Treasury market has provided a more accurate reflection of U.S. economic data so far this year, and rising yields show safe-haven bonds are losing their appeal.

  • The bond market's losses have come largely in concert with gains in U.S. and global equities, which have rallied since President Trump declared a "phase one" trade deal with China and the Fed announced its $60 billion per month bond-buying program in October.

Yes, but: Correlation is not causation, Lisa Shalett, CIO of Morgan Stanley Wealth Management, wrote in a Monday note to clients, arguing that yields are rising because of increased inflation expectations, not renewed growth.

  • It has been the Fed's decision to cut U.S. interest rates below the rate of average growth over the last decade and the monthly liquidity injections that are pushing rates higher, Shalett says.
  • "This is a market adjusting to ample liquidity, rising inflation expectations and the QE playbook. Liquidity is great if it makes its way to the real economy; but when it’s a prop to asset prices, it’s perilous."

Of note: The Treasury yield curve has meaningfully reversed its inversion in both the 3-month/10-year and 2-year/10-year curves.

  • The 10-year note yield was trading 36 basis points higher than the 3-month bill — the largest positive gap since January.
  • The difference between the 2-year and 10-year yield has risen to its highest since July.

Don't sleep: As I wrote on Oct. 31, the Fed's bond-buying program looks to have played a significant role in the yield curve rising out of inversion.

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