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Financials

U.S. bond yields could keep rising after piercing 1%

NEW YORK, Jan 8 (Reuters) - U.S. bond yields could be headed still higher after piercing 1% this week, according to analysts and investors who point to a wide gap between the benchmark Treasury yield and the next key support level.

Driven by the Democratic victory in Georgia, the 10-year Treasury yield on Thursday hit its highest level since March at 1.088%, breaking out of recent trading ranges.

Yields rose on expectations a Democrat controlled Congress would have the clout to pass more fiscal stimulus and spending, bolstering economic activity and debt issuance.

“All signs do now point to a move to a new, higher rate range,” said William O’Donnell, rates strategist at Citigroup. The next level at which the 10-year yield could meet meaningful resistance is 1.44%, said O’Donnell, the multi-year low in 10-year yields that held from 2012 until February 2020, when coronavirus fears led to market mayhem and yields collapsed.

The benchmark yield hit a low of 0.318% in March; by December yields were trading in a range of about 0.87% and 0.99%.

Analysts and traders look at technical support and resistance levels to identify price points at which trends tend to stall. The expectation is that yields will rise - absent a change in macroeconomic conditions - until they reach these key technical levels of resistance.

“It may follow that the rise in rates from here... could be as swift as the March 2020 decline that took us to the lows,” said O’Donnell.

U.S. rates had been trading in narrow ranges for months - with the 10-year yield stuck in a 15 basis point band since early November - but broke through this week to levels last hit during March’s market volatility.

For Andrew Brenner, head of international fixed income at National Alliance, the next significant technical level for the 10-year is around 1.28%, the high it hit in March. He noted, however, that months of narrow trading may mean a few stops on the way up.

The rise in 10-year yields was also attributed to a selloff in longer-dated Treasury positions by Commodity Trading Advisors (CTAs), funds which trade based on momentum, wrote Edward Acton, a rates market strategist at Citigroup.

The selloff trigger was 1.02%, wrote Masanari Takada, macro and quantitative analyst at Nomura, and CTAs may begin to establish short positions if the 10-year yield reaches 1.10%, suggesting there could be further upwards pressure on yields.

Rising rates, which can raise the cost of borrowing for individuals and businesses, may become a concern for the Federal Reserve, although Richmond Federal President Thomas Barkin said on Thursday he regarded the rise in yields as a sign that investors were factoring future hikes in prices into their decisions, rather than representing a worrisome tightening of financial conditions.

The Fed at its past two policy-making meetings has discussed the possibility of increasing its purchases in longer-dated debt which could act as a cap on rates.

The possibility of further Fed intervention, and demand for safe-have securities like Treasuries, have kept some investors skeptical that rates can move much higher in the near term.

“I am still digging my heels in a bit on the rates side of things. While we have crossed 1%, and the trend has certainly been upward, there are still numerous headwinds at play which should temper another leg up,” said Nick Maroutsos, head of global bonds at Janus Henderson.

Reporting by Kate Duguid; editing by Megan Davies and Richard Pullin

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