U.S. Treasury Market Faces Continued Selloff

Researchers at Barclays warn that there is still potential for a continued selloff in U.S. Treasurys, which has recently led to the highest levels of 10- and 30-year yields since 2007 and 2011, respectively.

The Era of Low Rates Might be Over

While the selloff took a break on Friday, the steady climb in long-dated yields throughout the week suggests that the era of low rates may be coming to an end. This new normal in the bond market can be attributed to various factors, including a resilient U.S. economy, signals from the Federal Reserve's last meeting indicating possible interest rate hikes, and higher inflation-adjusted yields. Long-term rates yields are beginning to align with historical trading patterns seen in the early 2000s.

Shifting Dynamics and Increasing Concerns

In the past six days, the 10-year Treasury yields have risen by 29.6 basis points, while the 30-year Treasury yields have increased by 23.3 basis points. These changes have caused year-to-date returns in the Treasury market to turn negative this week. Barclays notes that despite the significant rise in yields, they believe there is still room for further increases and cautions against fading the selloff. This view is further supported by "building stress" observed in the options market.

Conclusion

As the U.S. Treasury market experiences continued selloff, it becomes clear that the era of low rates may be drawing to a close. Factors such as a strong U.S. economy and indications of future interest rate hikes contribute to this shift in dynamics. It remains to be seen how these changes will impact investors and the broader financial landscape moving forward.

US Economy Shows Strong Momentum

The data and projections are aligning to indicate a US economy with significant momentum. The Atlanta Fed's GDPNow forecasting model predicts that real gross domestic product (GDP) growth could reach an astonishing 5.8% for the third quarter. Even if this estimate is discounted, experts believe that the economy will continue to grow at a solid pace.

The fact that the economy is growing above trend, potentially accelerating, despite policy tightening raises questions about whether monetary policy is truly tight. This uncertainty has led to an increase in real yields, as markets react to the surprisingly strong growth.

The recent selloff in the Treasury market, which resulted in multiyear highs for long-dated yields, has negatively impacted demand for fixed income. Specifically, short- and long-term corporate bond funds, inflation-protected funds, and high-yield funds with lower-rated securities (BB+ and below) have been affected.

It's worth noting that rising yields are not limited to the US; they are also occurring globally in countries like Japan, the UK, and Germany. The "higher-for-longer" theme seems to be taking hold worldwide.

This week's selloff in the Treasury market marks a shift in sentiment from earlier this year when concerns about a possible US recession held back long-term yields. The appeal of government debt as a safe-haven investment prevented yields from climbing too high.

On Friday, risky assets were affected by adjustments in the bond market. US stocks, including the Dow industrials, experienced a downward trend in late-morning trading in New York. Despite this, buyers emerged for US government debt, leading to lower yields in the 1-year through 30-year Treasury bonds. The 5-year rate saw the most significant decline. Currently, the 10-year and 30-year yields stand at 4.23% and 4.36%, respectively, stepping back from their highest levels since 2007 and 2011.