The downward trend in long-end U.S. Treasury yields continued on Thursday, July 8.
The 10-year benchmark U.S. bond yield has moved down for eight straight days, not only falling back below 1.30 percent, but also touching 1.25 percent before the U.S. stock market, setting a new near five-month low. The 30-year U.S. bond yield also lost 1.90 percent for the first time since February of this year.
At the day’s low, the 10-year U.S. bond yield was sharply lower by about 50 basis points from its March peak of 1.77%, down nearly 13 basis points from 1.42% at the end of last week, and down 11 basis points in just two trading days this week, with the 10-year real yield falling to about -0.96% from -0.93% at the end of last week.
At the other end of the yield curve, the three-month U.S. bond yields higher, two-year U.S. bond yields down more than 2 basis points, but the decline was less than the long-end yields, which led to the continued flattening of the U.S. bond yield curve, interpreted by analysis as a taste of the arrival of “stagflation”.
Bond market fears of a recovery topping out and inflation expectations pulling back have been reflected in European and US stock markets on Thursday
Long bond yields fell mainly reflects the market fears of a new crown Delta variant of the virus to make a comeback, thus threatening the U.S. and global economic recovery. Bloomberg said the logic of this narrative, which has been playing out in the bond market for several days, has finally been passed on to the European and U.S. stock markets, making the reflation trade (reflation) no longer glorious.
The S&P 500 Index fell 1.6% on Thursday, the biggest intraday drop since May this year, with all major industry sectors down, led by industrial, commodities and financial stocks sensitive to the economic recovery, seen as “the latest sign that the once-hot reflation deal is breaking down”. And in the past nine trading days in eight days, the S&P market had a record closing high.
European stocks were also led by cyclical stocks, with the pan-European Stoxx 600 index closing down 1.7%, its biggest one-day drop since April 20, led by cyclical and value stocks, with mining, banks and automakers down more than 2%, as investors worry that growth in these sectors will slow along with the recovery. 10-year German bond yields hit multi-month lows, with safe-haven buying pushing the Swiss franc and the yen to top performance. .
Meanwhile, falling yields on long bonds also indicate weaker market expectations for inflation. Today, the 30-year U.S. bond break-even inflation rate, which reflects inflation expectations for the next 30 years, fell to 2.18% of the line, the lowest since March this year, having peaked at 2.41% in May. In fact, the break-even inflation rate for all maturities fell from last week.
Investors rethink reflation logic as U.S. job market repeatedly delivers unfavorable news and major countries extend stimulus support
According to Wise Castle’s analysis, it looks like the current round of lower long bond rates is the result of falling inflation risks and a contraction in term premiums.
According to Jim Caron, portfolio manager at Morgan Stanley Investment Management, the current backdrop is a combination of three factors: “economic growth peaking, inflation peaking, and policy stimulus peaking,” and investors are suddenly forced to rethink how to reposition.
Comdirect Bank AG strategist Andreas Lipkow also said: “risks are increasing, negative news is growing, given the good performance in the first half of the year, more and more investors are beginning to feel nervous.”
The negative news in the mouth of the above analysts mainly refers to the slowdown in the rebound of the U.S. labor market. The U.S. non-farm unemployment rate rose more than expected in June, the ISM service sector employment sub-index fell back into contraction range and hit a six-month low in June, and the U.S. first jobless claims released today also unexpectedly rebounded and were higher than expected.
At the same time, the global major economies have been sending signals to expand or extend easing support, also increasing doubts about the recovery hitting the top. This week’s news that Japan is considering a new round of fiscal stimulus, the European Central Bank is following the Fed’s lead in pushing for an upwardly revised “symmetric” 2% inflation target and is thought to be extending easing, and China also unexpectedly mentioned the first “downgrade” of the year, all of which will affect the stock and bond markets. The bond market.
Margie Patel, portfolio manager at Wells Fargo Asset Management, told the Financial Times that “the market could be at a major inflection point” with the new outlook for the economy and inflation. The yearly returns of growth stocks in the S&P 500 index rebounded over value stocks on Tuesday, with Margaret Kerins, global head of fixed income strategy at BMO Capital Markets, expecting a sharp drop in borrowing costs to drive many companies into the bond market and BlackRock cutting its outlook on U.S. high-yield bonds this week.
Analysis: Focus on whether the 10-year U.S. bond yield falls below 1.25%, or risk of stock market decline increases
Currently, Wall Street has mixed views on the trend of long-end U.S. bond yields for the rest of the year. Andrew Sheets, chief cross-asset strategist at Morgan Stanley, said the 10-year U.S. bond yield “will eventually continue to move higher” and reach 1.8% by the end of the year. Steven Major, global head of fixed income research at HSBC Holdings, and other bond market bulls believe that the 10-year U.S. bond yield will fall further to 1%.
Ed Hyman, chairman and head of economic research at Evercore ISI, said in a research note that the drop in bond yields may indicate that the inflationary burst is temporary and/or that the new crown Delta variant virus will slow economic growth, but a drop in the 10-year U.S. bond yield to 1.25% is somewhat extreme.
Mark Haefele, chief investment officer at UBS Global Wealth Management, agrees that the trend of falling bond yields and capital flight from cyclical stocks will reverse as the oil price retreat and pressure on yields are temporary and the latest economic data highlights supply chain disruptions rather than a slowdown in overall economic growth.
George Ball, chairman of financial services firm Sanders Morris Harris, today cited technical factors as the main driver of the decline in U.S. bond yields. After the Fed’s June FOMC meeting minutes released on Wednesday reaffirmed patience with QE and no rush to cut bond purchases (taper), many investment managers changed course and covered their short positions in the bond market, which in turn depressed bond yields.
Kim Forrest, founder and chief investment officer of Bokeh Capital Partners, a provider of investment management services, said the 10-year U.S. bond yield remained lower after the June FOMC minutes showed the Fed would eventually slow QE bond purchases and even tighten policy earlier than expected, and “it looks like bond traders are ignoring the Fed’s future moves.”
Regardless of how deeply analysts disagree on the changes in the bond market, Chris Harvey, head of equity strategy at Wells Fargo Securities, noted that the indicator that stocks will look to in the future is whether the 10-year U.S. bond yield will fall below the key value of 1.25 percent.
“If (the 10-year U.S. bond yield) falls below 1.25 percent, it could lead equity portfolio managers to believe that something is seriously wrong. As a result, we see an increasing likelihood that stocks will fall 5% before the next earnings season.”
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