Treasuries suffered a massive sell-off. It’s all the more reason people might buy – and there’s a lot of money waiting in the wings.
The 10-year Treasury fell this week, pushing its yield up to 3.8% after being flat a few days earlier in the week. That’s up from the low point of just over 3.3% for the year, reached before this week.
A few factors led to the biggest increase in yield.
First, the markets have become convinced that the recent banking problems will not cause economic catastrophe. This means that demand and inflation are not going to fall off a cliff, even if growth slows due to increases in short-term interest rates by the Federal Reserve, which aim to rein in rapid increases in commodity prices. goods and services.
Second, towards the end of this week, the stock market jumped, which is not helping the bond market. It wasn’t the most economically sensitive stocks that led the market higher, but rather Thursday’s 2% gain in the tech-heavy Nasdaq Composite following explosive results from Nvidia (NVDA) . Sometimes such a powerful move means market participants have had to sell various assets, including safe government bonds, to buy higher-risk, higher-return stocks.
The resulting drop in Treasury prices sets the stage for a Treasury rally in the coming weeks. The yield is certainly more attractive to investors now, which could attract buyers. The average annual inflation expectation over the next 10 years is around 2.25%, according to the TIPS market, which means that the bond’s current yield is around 1.5 percentage points. higher than where average annual inflation might land. Historically, this is a solid performance. The actual yield, that is, how far the yield is above inflation expectations, is not far off a recent multi-year high of around 2 percentage points. Now may be the time to buy the bond while the yield is still relatively high.
Finally, bonds offer an acceptable return for anyone wishing to hedge against stock market volatility. This is especially true if economic growth is slowing and there is short-term risk to equities.
Right on cue, the money is currently being set aside to buy government bonds. Nearly $5 billion flowed into Treasury funds this week, according to Bank of America, the 15th consecutive week of inflows. Last month’s weekly average is now around $3 billion. Some of the money that has been paid into these funds is used up fairly quickly depending on the type of fund, but others are not. The dry powder is waiting to buy Treasuries and many on Wall Street often use money flow data as a barometer of sentiment across different asset classes, so this recent data shows a general hunger for Treasuries.
Picking up bonds here isn’t a bad idea.
Write to Jacob Sonenshine at firstname.lastname@example.org