Treasury Yields Reflect Desire For Riskier Assets
MrTopStep | Apr 24, 2016 03:59AM ET
Treasury prices fell Friday for the fifth straight session, pushing yields to their highest level in a month, as strong gains in oil futures and high-yield debt dampened demand for safer assets including government debt.
Over the past month, the Treasury market has been moving under the influence of price action in so-called risk assets, namely equities, oil and high-yield bonds, analysts said.
After the Federal Reserve adopted a more dovish tone than the market had anticipated, “risk appetite picked up, which led to the outperformance of high-risk asset classes,” said Robert Tipp, Prudential Fixed Income’s chief investment strategist.
As a result, Treasury yields have been on a constant rise, not because investors are pricing in an interest rate hike anytime soon but because the rally in risk assets has led investors to sell treasuries, Tipp said.
Thursday morning, the yield on the benchmark U.S. 10-Year note TMUBMUSD10Y, +0.49% rose 2.1 basis points to 1.891%, its highest level since March 24. One basis point is equal to one-hundredth of a percentage point.
The yield on the U.S. 2-Year Treasury TMUBMUSD02Y, +1.99% advanced 1.2 basis points to 0.826% and the yield on the U.S. 30-Year bond TMUBMUSD30Y, +0.32% gained 1.7 basis points to 2.709%.
Investors have essentially ruled out an interest rate hike at the Fed’s April 26-27 meeting on monetary policy. A closely watched measure of the market’s Fed expectations, the CME Group’s FedWatch Tool, indicates a next-to-nothing 1% probability of a rate increase.
But the consistent uptrend in commodity prices, along with continued strength in the labor market, where new applications for unemployment benefits sank to the lowest level in 42 years, has led investors to consider that inflation might soon tick up and push up yields, said Brian Frank, president at Frank Capital Partners.
Inflation expectations are an important driver of long-term yields; higher inflation predictions drive up yields, and drive down prices, because it’s assumed investors will demand a greater yield to compensate for inflation’s corrosive effects.
Still, anemic gross-domestic-product growth and a dismal earnings season—expected to be the worst since 2009—make it hard to picture yields rising significantly in the near future, particularly amid ultra-low and negative interest rates in Europe and Japan, Frank said.
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Supporting that theme, on Friday a reading of manufacturing sentiment sank to its lowest level in six-and-a-half years.
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