NEW YORK, July 8 (Reuters) - A breakneck rally in U.S. government bonds continued on Thursday, with 10-year Treasury yields falling to their lowest levels since early-2021 as investors sensed cracks in the economic recovery and cooling risks of high inflation.
Yields were down as much as 7 basis points across the curve, and the 10-year note hit 1.25% before bouncing back above 1.29%, as prices surged yet again, in a sign that investors positioned for higher borrowing costs were reversing course. COMMENTS: WALTER TODD, CHIEF INVESTMENT OFFICER, GREENWOOD CAPITAL, GREENWOOD, SOUTH CAROLINA
“As far as rates go, I think that is related to this narrative of the Delta variant and the peak in growth.”
“You had this pretty big divergence. Rates have been going down for a while, and the (stock) market was just getting narrower and narrower and narrower and that is an unsustainable situation and at some point it has to self-correct and I think that is what you are seeing here.”
“One thing I would note is credit spreads have not budged, they are up a couple of ticks. That gives me some comfort that maybe this is not the start of something too dramatic.” SUBADRA RAJAPPA, HEAD OF U.S. RATES STRATEGY, SOCIETE GENERALE, NEW YORK
“I think there is a little bit of a preoccupation on the employment front where the market is questioning if the Fed will be able to make further progress on employment in order to meet its mandate before tapering asset purchases. You saw some cracks in the data that came out on Friday and then the ISM employment component seemed to show some weakness, so definitely the concern in the bond market seems to be along those lines. The market is pricing out the timing of the first rate hike, as well as the pace of rate hikes after the first rate hike, and that led to this flattening move in Treasuries.” JOSEPH LAVORGNA, AMERICAS CHIEF ECONOMIST, NATIXIS, NEW YORK
“In Q1, the market thought the Fed Funds rate would get back to where it was in the previous cycle at 2.38%. The question is why has the market’s expectation of the terminal rate come down so significantly? The primary reason is that the economy looks great. However, it’s the peak and growth is going to be weaker going forward. That ties into the transitory nature of things.
“There’s another piece. The prospect for stimulus and more government spending etc., have dimmed over the past few weeks. People aren’t talking about it but if the federal government’s budget isn’t going to go up to $6 trillion, that’s very bond friendly. I don’t think enough people have sort of focused on that.” STEVE ENGLANDER, HEAD OF NORTH AMERICA MACRO STRATEGY, STANDARD CHARTERED, NEW YORK
“I think there’s a market dynamic today that’s driving it down. But the focus actually seems since the beginning of June is a correlation between COVID fears, weakness in COVID-sensitive stocks versus COVID-insensitive stocks, suggesting that the concern about the delta variant may be bigger than expected. The last 48 hours, it’s kind of cascading into other markets.”
“It’s expected to lead to economic disruptions, lockdowns and so on.” PAUL HICKEY, BESPOKE INVESTMENT GROUP, NEW YORK (email)
“As treasury yields continue to plunge, equity investors are reading the rally in the bond market as a sign of weakness ahead and taking profits now. The S&P 500 is currently indicated to open down about 1.25%, and in a sign of just how uniform the decline has been, both the Dow and Nasdaq futures are also in the red by about the exact same amount.
“Naturally, all sorts of catalysts are being blamed for the decline ranging from the growing threat of the Delta variant, a weaker than expected economic recovery, or lack of an infrastructure deal. Sometimes, though, the market doesn’t need an excuse to sell off and it just needs to let off some steam.”
Compiled by the Global Finance & Markets Breaking News team
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