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U.S. Treasuries Are Not Supposed to Trade Like This

Brian Chappatta

(Bloomberg Opinion) -- In a week that has already been record-setting in financial markets by any number of measures, the moves in the 30-year U.S. Treasury bond stand alone as jaw-dropping and unprecedented.

On Monday, the long bond opened at a yield of 0.99%, down 30 basis points from where it closed the last trading session and the first time ever it fell below 1%. About seven hours later, a relentless rally would push the yield to as low as 0.6987%, a drop of 59 basis points that Bloomberg News’s Elizabeth Stanton noted was the largest intraday drop on record. During U.S. trading, as equity markets plunged more than 7%, the yield gradually pared back that drastic move, ending where it started at about 1%.

On Tuesday, the long bond opened at 1.06%. It would go on to reach 1.27% by 7 a.m. in New York and then, after a volatile session, reach as high as 1.3236% as equities advanced almost 5%.

All told, in the span of roughly 36 hours, 30-year Treasury yields surged 62.5 basis points from trough to peak. Measuring from the intraday high on March 6 to the low on Monday, the drop was a staggering 85 basis points. 

Those sorts of rapid swings don’t happen to long-term Treasuries. I mean that literally. Two-day moves of such magnitude have never happened before since the Treasury Department began issuing the 30-year maturity in the 1970s.(1)

The reason it’s unprecedented is fairly straightforward. Thirty-year Treasuries are among the purest expressions of the long-term outlook for U.S. economic growth, inflation and the path of interest rates available in financial markets. Those are subject to structural forces that don’t just change overnight. The Federal Reserve can deliver a surprise cut to interest rates, which can lower short-term Treasury yields in a hurry, but that traditionally has a more minor impact on the longest-dated securities. The assumption is that lower rates would stimulate the economy, leading to higher growth and inflation, which would eventually cause the central bank to bring rates back up again. The long bond spans multiple economic cycles.

The past two days of trading suggest that line of thinking might no longer hold. Here are a few scenarios that would explain why traders were piling into 30-year bonds with yields below 1%:

The Fed will be stuck keeping its key lending rate at or near 0% for the foreseeable future. There’s virtually no risk that the central bank will raise interest rates again out of fear that the U.S. economy can’t withstand it. Neither central bankers nor elected officials can stave off a recession that includes a period of deflation. Foreign bond buyers see their home country yields remaining negative indefinitely and are panic-buying a safe, liquid asset that still offers a positive yield. Speculators and momentum traders are riding the Treasury rally to its extremes. All of the above.

I’m going to go with No. 5.

After the violent sell-off in risk assets to start the week, Wall Street’s base case was for the Fed to drop the fed funds rate to the 0% to 0.25% range by mid-year. Even after Tuesday’s bounce, bond traders still expect Chair Jerome Powell to announce another 50-basis-point cut when the central bank’s meeting concludes on March 18, followed by another move or two in the coming months. At this point, it’s fairly obvious that the Fed can only shift interest rates in one direction. Powell has made it clear that policy makers are not even considering the possibility of raising rates without seeing inflation persistently above their 2% target.

That sort of price growth seems as unlikely as ever. Break-even rates plunged this week with oil prices after Saudi Arabia declared a price war. The risk now is disinflation or even outright deflation. With the fed funds rate already well below neutral, it’s also an open question what tools the central bank has, if any, to lift inflation back to target. 

As for non-U.S. investors piling into Treasuries, the big swings in Asian and European trading hours suggests that something is afoot. “Given the relevance of the overnight session in establishing the tone on Tuesday, our attention will be decidedly on the ability of any selling to extend in Asia,” BMO Capital Markets strategists wrote. Meanwhile, speculators increased their positions in eurodollars to a record net long in the week ended March 3 and were also bullish across 10-year note futures, according to Commodity Futures Trading Commission data. In bond futures, asset managers were the most long since 2010.

Given the market moves of the past few weeks and the barrage of headlines surrounding the coronavirus, it’s a fool’s errand to predict what will happen next. But the long bond seems to have been ensnared in traders’ doomsday scenarios. Maybe the Trump administration or Congress will unveil some sort of fiscal stimulus that lifts the markets and convinces Fed officials that they’re not the only adults overseeing the world’s largest economy. As my Bloomberg Opinion colleague Conor Sen wrote, bond buyers at these recent levels wouldn’t like that very much. And as he said: So what?

The long bond was never intended to be an ultra-volatile security that swings aggressively based on the whims of U.S. stocks. And yet that’s what just happened. The iShares 20+ Year Treasury Bond exchange-traded fund suffered its steepest intraday decline on Tuesday since inception in 2002. On Monday, it climbed the most on an intraday basis since 2002.

The coming days could very well bring further bouts of volatility. It’s the sort of whiplash that’s enough to make even an ardent tracker of the world’s biggest bond market go numb.

(1) Bloomberg data began recording daily highs and lows in 1998. The 30-year yield rose 50 basis points in two sessions in February 1980 and fell 69 basis points in two sessions in November 2008, from 4.12% to 3.43%.

To contact the author of this story: Brian Chappatta at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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