Breaking News
0

Sea of red in Treasury market may signal bond boom is over

EconomyJul 09, 2018 04:30AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
2/2 © Reuters. Traders work on the floor of the NYSE in New York 2/2

By Kate Duguid

NEW YORK (Reuters) - The 10-year U.S. Treasury note that debuted in August 2016 <9128282A7=RRPS> when the bond market was near its peak has had a rough ride, its price falling ever since and no reprieve in sight.

Welcome to the new U.S. Treasury market, where 75 percent of existing government bonds are now trading below par.

Despite high demand at auction, the price of the August 2016 bond began falling the day it hit the open market, roughly a month after benchmark 10-year yields (US10YT=RR) reached historic lows. Now priced at 10 points below face value, it yields 2.833 percent, almost double its record-low 1.50 percent coupon, meaning so far a negative total return of around 8 percent. Unless prices rebound, fixed income investors could be nursing sustained losses for the first time since a bull market in bonds took hold 30 years ago.

Over the past two decades relief came every time more than half of bonds traded at a discount as that coincided with peaks in Federal Reserve policy rates, which were followed by an easing cycle, an analysis of the ICE Bank of America/Merrill Lynch Treasury index shows.

This time, there are signs the sea of red in Treasury bonds could signal a bear market rather than offer a chance to scoop up bargains.

"The market is trying to figure out if this is a buying opportunity or not," said Donald Ellenberger, senior portfolio manager and head of multi-sector strategies group at Federated Investors, Inc.

For one, there has not been this much debt trading below face value since the data began being recorded in mid-1980s, according to Jeff Mills, co-chief investment strategist at PNC Financial Services Group (NYSE:PNC).

For graphic on ICE BofA/Merrill Lynch Treasury Index click https://reut.rs/2tRvoGV

This is a result of a long spell after the global financial crisis when bonds were issued at ultra-low rates, so those which still trade do so at deep discounts to match returns of newer issues. But since such "off-the-run" issues are less sought after than new bonds and so many of them are underwater, their prevalence weighs on overall liquidity - the ease with which securities trade without affecting prices.

Then there are widespread expectations that the Fed, which started raising rates in December 2015, has some way to go. Markets continue to price in two more rate increases this year, given the Fed's inflation gauge hit its target for the first time since 2012 and economic growth remains strong.

Finally, a once-in-a-generation shift in the balance of supply and demand may make bonds harder to trade, possibly hitting their prices, some investors say.

While the Fed unwinds its crisis-era policies by paring back its bond purchases and shrinking its $4 trillion portfolio, the Treasury is ramping up borrowing to fund $1.5 trillion in tax cuts President Donald Trump signed into law last December.

For graphic on rough ride for this off-the-run Treasury click https://reut.rs/2IPwAyZ

It is unclear whether sufficient demand exists to soak up the supply, with government debt sales estimated to reach $1.3 trillion in 2018, more than double last year's figure, according to JPMorgan (NYSE:JPM).

Such a spike in supply of new debt could mean that off-the-run securities, despite hefty discounts, could struggle to find buyers. A widening of spreads between yields offered by off-the-run bonds and the newest securities already suggest growing concerns about the market's liquidity.

Since off-the-run securities trade less - they make up 98 percent of the $14.5 trillion Treasury market but only a third of its daily trading volumes - they offer a yield premium to new issues and that premium has risen for most maturities.

For example, the yield premium on the two-year note was negative at the beginning of the year, and has risen by 0.68 basis point since Jan. 5 to 0.58 basis point on July 6.

"The risk is - with the off-the-runs, the cycle and the issuance - that the stage could be set ... for a liquidity crisis," said Josh Holden, chief information officer at OpenDoor LLC.

Since all issues become off-the-run at some point, liquidity concerns could spread throughout the market, potentially raising the U.S. government's borrowing costs. It has not happened yet and some analysts argue demand for Treasuries both at home and abroad should remain strong given a lack of alternatives, but others say the market has already become less liquid.

"It is getting harder to transact, even in the most liquid market in the world, relative to past experiences," said bond market veteran Gregory Peters, senior portfolio manager at PGIM Fixed Income, the asset management arm of Prudential Financial (NYSE:PRU).

Sea of red in Treasury market may signal bond boom is over
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments
Silverbug 19
Silverbug 19 Jul 09, 2018 8:20AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
What selling? They hide all the data.
Reply
0 0
Silverbug 19
Silverbug 19 Jul 09, 2018 8:19AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
What shrink? They hide all the data now.
Reply
0 0
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email