Thomas Costerg doesn’t usually go to bed with a computer, but he couldn’t help himself Thursday night after what had just happened in the Treasury market.
“I could not sleep well,” said the senior U.S. economist at Pictet Wealth Management in Geneva. “These were quite extreme moves.”
With a ferocity that caught nearly everyone off guard, one of the most vital numbers in global finance — the yield on 10-year Treasuries — spiked back to where it’d been before the pandemic caused markets to go nuts 12 months ago.
BloombergYou might think that was reason to celebrate — a welcomed finish line to cross as the world tries to return to normal. After all, yields had sunk toward zero because of virus panic. So surely getting back to 1.47% — where 10-year notes finished on Feb. 21, 2020, before a weekend of dire coronavirus news woke investors up to the threat and kick-started the most painful period in markets since the Great Recession — would be welcomed news?
Not at all.
“The mood was bordering on frantic,” said Emily Roland, the Boston-based co-chief investment strategist for John Hancock Investment Management and its $164 billion of assets.
Almost everything that matters was red Thursday. Treasuries sank, driving the yield on 10-year notes up as many as 23 basis points to 1.61%. Stock losses were most pronounced in Nasdaq-100 and small-cap shares that, with help from frenzied speculators and economic optimists alike, had led equities higher. Corporate bonds continued to rack up the biggest losses since the pandemic began as companies scramble to sell debt before yields go up even more. The dollar surged in a classic haven trade.
The bond market has for weeks signaled an inflection point could be coming, with soaring interest-rate options and the steepest U.S. yield curve in years suggesting big shifts afoot. That also suggests turmoil may resurface in the days ahead.
The auction
What had been a rough day turned terrible at 1 p.m. Thursday when the U.S. Treasury Department auctioned $62 billion of seven-year debt. It was a disaster. Demand was the lowest in the auction’s history — a development that scared investors so much that yields across the curve spiked. In just a few minutes, the 10-year jumped to 1.61% from 1.49%.
BloombergThe yield shift was most extreme in five-year Treasuries, where the longer-term outlook for monetary policy is represented. Their surge upended wagers on a steeper yield curve, which had been reliably profitable for months. Traders exiting those positions fueled additional curve-flattening that further eroded profits in the trade. The exodus also shifted pricing for the next Fed rate hike. At one point, the market came close to pricing in a full 25-basis-point increase as early as the end of next year.
Joe Gilster, a rates trader at DV Trading, had started his day at 5 a.m. in Chicago, but, so he could accompany his 37-weeks-pregnant wife to the doctor, he’d pared back his portfolio’s risk by 10:30 that morning. “When I left, it was bad, but not like crazy,” he said. But then the texts started pouring in. “Dude, get back to your desk, this is insane,” was the core message.
He stayed with his wife — it’s their first kid — but tried to act calm. “I didn’t want my wife to get worried or anything.” Gilster recalls thinking: “I cannot believe the prices I’m seeing in the eurodollars.” Gilster was back in action at 1:30 p.m., and kept at it until midnight. “I was lucky,” he said, “to miss the absolutely crazy part of the day.”
Although the trouble began in bonds, it spread everywhere. In the stock market, the Nasdaq-100 hit its lowest point a few hours after the bond auction, ending down 3.6% for the day.
“An orderly move higher in rates, equity markets should be able to digest,” said John Hancock’s Roland. “But because it was so fast and the magnitude was so great, that caused investors to panic a little.”
Michael Antonelli, an equities guy at heart, spent the day speaking to his Wall Street peers trying to figure out why yields were moving so fast. All the Robert W. Baird & Co. market strategist kept hearing was, “that was a sloppy seven-year auction.” His clients weren’t panicking, but Antonelli sensed confusion. He admits he was confused, too.
“Did we just hit the level on a 10-year where I should be worried? The reality is, everyone is asking this question. We simply don’t know,” he said.
One issue with higher rates is that it could be a sign that the U.S. economy is recovering too quickly from the pandemic. Federal Reserve officials haven’t shown concern about the rapid rise that’s lifted the 10-year from 0.91% on New Year’s Eve. “I am not worried about that,” Atlanta Fed President Raphael Bostic said Thursday.
Sleepless in Geneva, that didn’t sit well with Pictet’s Costerg. “I was surprised to see the almost complacency from Fed officials, with naive comments about U.S. bond yields reflecting a stronger outlook,” he said.
