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Tumbling Treasuries Drive Yields to Highest Levels in a Month

Vivien Lou Chen and Emily Barrett

(Bloomberg) -- The U.S. bond market’s September sell-off kept going on Tuesday, driving Treasury yields to the highest levels in a month, as traders gird for a potentially pivotal European Central Bank decision.

Treasuries came under pressure as the U.S. auctioned $38 billion of three-year notes and investment-grade corporations continued a wave of issuance, expanding the supply of bonds. But to Thomas Simons, an economist at Jefferies LLC, the biggest catalyst was concern that the ECB won’t meet market expectations for a resumption of quantitative easing.

“The ECB’s bond purchasing programs tend to have quite a significant spillover effect into our markets, so it’s highly significant if they either don’t announce a QE program or if it’s smaller than expected, or if they don’t expand the issues they can buy,” he said. “There’s a lot of different ways the ECB could bring a disappointing package at this meeting.”

Two-year yields jumped as much as 9.3 basis points to 1.69% on Tuesday, a rate last seen on Aug. 5. The 10-year got to 1.74%, also the highest level in a month.

It’s a remarkable turnaround. Treasuries returned 3.4% in August, the best monthly return since the depths of the 2008 financial crisis, according to a Bloomberg Barclays index. But bonds have not fared well in September. The same Treasuries index plunged 0.7% on Thursday, its worst daily performance since the day after Donald Trump was elected president in November 2016.

While Wall Street has generally shied away from predicting Treasuries would drop, strategists at Morgan Stanley and Citigroup Inc. last week advised caution heading into the ECB meeting and the Federal Reserve’s Sept. 18 policy decision.

Another haven, the yen, also weakened as Treasuries declined. The dollar advanced 0.3% against the Japanese currency on Tuesday, reaching a one-month high of 107.59. Gold lost 0.9%.

--With assistance from Edward Bolingbroke and Elizabeth Stanton.

To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net;Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Nick Baker, Mark Tannenbaum

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