September Outlook: Bleak Returns on U.S. Government Debt
The sell-off in long-dated Treasuries has intensified, causing yields to plummet and impacting current holders. The Bloomberg U.S. Treasury Total Return Index predicts bigger losses than February. Bearish momentum continues following the Federal Rese...
Troy D. Hanson
September 28, 2023
September is shaping up to be the most challenging month for total returns on U.S. government debt in the past year.
The sell-off in long-dated Treasuries on Thursday has intensified, causing the 10-year and 30-year yields to plummet to levels not witnessed in over a decade. As yields rise, the value of the underlying securities decreases, disproportionately impacting current holders of Treasuries.
Bearish Momentum in Government Debt Continues
With only two trading sessions left for the month, September is not looking promising for bond traders. The Bloomberg U.S. Treasury Total Return Index, which is used to gauge performance, shows that Treasurys are on track to end the month with bigger losses than those observed in February of this year. As of Thursday morning, the Bloomberg index has already dropped 2.5% for the month, surpassing February's 2.34% decline. It is important to note that this index does not directly reflect changes in Treasury prices but instead provides standardized adjustments to better capture the performance of U.S. government debt over a given period.
This month has seen relentless bearish momentum in government debt, particularly in the past week following the Federal Reserve's policy decision on September 20th. Macro strategist Will Compernolle of FHN Financial in New York highlights that markets are expressing increased confidence in the Fed's message of a sustained "higher for longer" fed funds rate.
Looking back to February, traders and investors were already adjusting their expectations towards further tightening by the Federal Reserve. This shift was influenced by a blockbuster nonfarm payrolls report for January and a still-hot inflation report for the same month. These factors ultimately contributed to the collapse of California's Silicon Valley Bank.
Market Analysis: Treasury Weakness in September
In February, a significant weakness in Treasury bonds was observed primarily in the shorter end of the yield curve. This weakness was due to changing expectations regarding the fed funds rate. However, as we transition into September, the changes are now more pronounced in the longer end of the curve, influenced by a higher expected fed funds rate and inflation.
According to Compernolle, a financial expert, banks are adopting a cautious approach. Instead of adding new assets to their balance sheets, they are striving to maintain stability. This cautious stance is driven by the challenging environment of compressed net-interest margins and limited room for risk-taking. Banks are hoping to navigate this landscape until the Federal Reserve initiates rate cuts, which would provide some relief.
During late-morning trading on Thursday in New York, the selloff in Treasury bonds intensified, resulting in yields on 5- through 30-year bonds nearing the 5% mark. On a positive note, all three major U.S. stock indexes (DJIA, SPX, COMP) experienced upward movement.