Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Five metrics bond investors are watching as COVID fears return

EconomyJul 23, 2021 05:05PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

By David Randall and Saqib Iqbal Ahmed

NEW YORK (Reuters) - A wild week in Treasuries has investors parsing the cross-currents that may sway prices for U.S. government bonds in coming weeks, including the Federal Reserve, economic data and investor positioning.

The yield on the benchmark 10-year U.S. Treasury, which moves inversely to bond prices, recently stood at 1.28% on Friday, after falling as low as 1.128% earlier in the week, nearly 65 basis points below its 2021 high on worries over slowing growth and spreading COVID-19 infections.

Flows into the iShares 7-10 Year Treasury Bond (NYSE:IEF) ETF hit around $1.2 billion in the week ending July 21, their highest in a year according to Lipper, illustrating the demand for U.S. government bonds.

One of the key questions now hanging over markets is whether Treasury yields will continue moving toward 1% - revisiting the levels they touched during the pandemic - or rebound toward 2%, a level many participants expected to see by year-end.

Here are some indicators investors are watching to determine the course of the Treasury market.

GRAPHIC: A sooner rate hike - https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoyrxzpx/Pasted%20image%201627056583204.png

TAPERING TALK

The Federal Reserve surprised many market participants with a hawkish shift at its June policy meeting, with its so-called dot-plot showing some officials moving up expectations of their first rate hikes to 2023.

With the Fed’s policy meeting concluding on July 28 and the central bank’s annual symposium at Jackson Hole scheduled for late August, investors will be watching for signs that officials are backpedaling on assurances that the current bout of inflation is transitory, a message that could rattle markets.

Investors will also be looking for signals on whether officials believe the Delta variant of COVID-19 may pressure growth, potentially delaying the unwinding of the Fed’s easy-money policies and depressing yields.

GRAPHIC: Treasury yield and high-yield spreads - https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgmxlepb/Pasted%20image%201627056411388.png

YIELD SPREADS

While Treasury yields have slid, the spread between Treasuries and high-yield bonds has remained steady. That suggests that some investors remain bullish on the economy overall, while short-term factors such as positioning and supply are driving the rally in Treasuries, said Jonathan Golub, chief U.S. equity strategist at Credit Suisse (SIX:CSGN), in a report.

GRAPHIC: Speculative positioning - https://fingfx.thomsonreuters.com/gfx/mkt/jnvwegwjgvw/Pasted%20image%201627057003568.png

SHORT INTEREST

Leveraged funds - including hedge funds - have piled into bearish bets on U.S. Treasuries as part of the so-called reflation trade, which saw investors position for lower yields and buy shares of companies that could benefit from a powerful rebound in growth. [L1N2OX2MM]

While net speculative bets on 10-year Treasury futures flipped into bullish territory for the week ended July 13, those on other maturities, including 30-years, remained bearish, data from the Commodity Futures Trading Commission showed.

A reversal in that positioning could fuel Treasury gains and drag yields lower.

GRAPHIC: Citi economic surprise index - https://fingfx.thomsonreuters.com/gfx/mkt/akpezgaoqvr/Pasted%20image%201627051810140.png

ECONOMIC DATA

While the economy continues to rebound from last year’s swoon, worries that the pace of growth is slowing contributed to the rally in Treasuries earlier this week.

Citigroup’s U.S. Economic Surprise Index, which measures the degree to which the data is beating or missing economists’ forecasts, stands at 11.6, compared with its record high of 270.8 touched in 2020.

Praveen Koropaty, U.S. interest rate strategist at Goldman Sachs (NYSE:GS), believes the Fed will want to see the employment reports from July, August and September before committing to an unwinding of its easy money policies.

At some point in November or December, “the Fed will announce a taper and I don't think the market will freak out as it will be well telegraphed,” he said.

GRAPHIC: Breakeven inflation rates - https://fingfx.thomsonreuters.com/gfx/mkt/znpnedzxwvl/Pasted%20image%201627056681745.png

BREAKEVEN INFLATION RATES

Breakeven rates - the spread in the yield between a Treasury note and a Treasury Inflation Protected Security of the same duration - are narrowing, a sign that investors are showing more faith in the Federal Reserve's estimate that high inflation will be transitory, wrote Craig Johnson, chief market technician at Piper Sandler.

"The rout in commodity markets and pullback in reflation momentum is giving the Fed’s forecast additional credibility," he said.

Five metrics bond investors are watching as COVID fears return
 

Related Articles

Ford wakes up badly burnt from its India dream
Ford wakes up badly burnt from its India dream By Reuters - Sep 17, 2021

By Aditi Shah NEW DELHI (Reuters) -When Ford Motor (NYSE:F) Co built its first factory in India in the mid-1990s, U.S. carmakers believed they were buying into a boom - the next...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other 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, don’t trash it.

  •           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. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. 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.
 
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