Nov 12, 2019

Treasury selloff is more about the Fed than the trade deal

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.

Go deeper:

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The market got the rate cuts it wanted

Data: CME FedWatch Tool; Note: Data as of Nov. 13 at 5:44pm CT; Chart: Andrew Witherspoon/Axios

Fed chair Jerome Powell again laid out his rose-colored view of the U.S. economy on Wednesday, telling the congressional Joint Economic Committee that he sees the U.S. as “being in a good place." He reiterated that a "material reassessment" of the economic outlook would be required for the Fed to raise or cut interest rates any time soon.

Why it matters: Powell's testimony was the cherry on top of the good news sundae that has sent traders' appetite for risk soaring over the last two weeks, and priced out expectations for further U.S. interest rate cuts through the end of next year.

Go deeperArrowNov 14, 2019

The market will need the Fed again in 2020

Illustration: Aïda Amer/Axios

The No.1 risk to the stock market continuing its outperformance next year is not President Trump or consistently weak U.S. economic data or even China, senior analysts at John Hancock Investment Management say, but whether or not the Fed continues to stimulate the economy through what they call "not QE."

What it means: Fed chair Jerome Powell has insisted the central bank's bond buying program — initiated after rates in the systemically important repo market spiked to five times their normal level in September — is not quantitative easing.

10-year Treasury yield slumps as U.S.-China trade deal remains elusive

Data: FactSet; Chart: Axios Visuals

The yield on the U.S. 10-year Treasury note touched a three-week low on Wednesday after a Reuters report dashed hopes the U.S. and China would sign a "phase one" agreement before the end of the year.

The details: A trade "deal is still elusive, and negotiations may be getting more complicated," per Reuters.

Go deeperArrowNov 21, 2019