Today the yield on the 10-year Treasury moved up 3 basis points, back above 2.80% to 2.83%, just about where it was before the flight to the safety of Treasuries sent yields back towards 2.70%
If you needed a lesson in the complex and sometimes frustratingly perverse bond market, you got one yesterday, Monday February 6. Stocks went to hell in a hand basket and bonds, which had been selling off, rallied on a classic flight to safety. Bond yields, rather than rising (which means bond prices are falling) actually retreated on that surge of demand with the yield on the 10-year Treasury falling a massive (for the Treasury market) 14 basis points to 2.71% from 2.85% the day before. (It takes 100 basis points to equal a percentage point.) That marked a disappointing debut to my position in my Volatility Portfolio in the ProShares Short 7-10 Year Treasury ETF (TBX), which fell 0.72% on the day. I suppose that’s better than taking a 4.1% loss in the Standard & Poor’s 500 stock index on the day, but, honestly, the point of this hedge was to make money not simply to lose less of it.
Is this starting to get serious? Wall Street still doesn’t think so. With the Standard & Poor’s 500 down 7.8% from its 2018 high, Wall Street continues to look for a 10% total decline. Which would mean that we’re way closer to the bottom than the top. Reasons for this relative optimism on a day when the Dow Jones Industrial Average fell 4.6% or 1175 points include:Â A drop in the yield on the 10-year Treasury to 2.71% today. That’s 14 basis points lower than yesterday (which means bond prices are higher.) If one reason for the market’s tumble is higher yields and the fear of higher yields yet ahead, then this pull back in yields on the 10-year Treasury should be supportive to stock prices.
We won’t know exactly how much four-week Treasury paper the government will try to sell on Tuesday until Monday, but we already know that the short-term Treasury market is in trouble. With Congress still fighting over a bill to extend funding to keep the government open past the February 8 deadline, there’s not even a credible effort to raise the ceiling on what the government can borrow.
The U.S. economy added 200,000 jobs in January, the Bureau of Labor Statistics reported this morning. Economists surveyed by Briefing.com had expected the 180,000 net new jobs. The official unemployment rate remained at 4.1%. The big news, though–the news that has rattled the bond market–is the increase in average hourly earnings
Last week we saw Treasury bond prices fall and their yields rise on weakness in the U.S. dollar. Today the dollar is stronger–up 0.31% on the Dollar Spot Index–but bond prices have still stumbled and yields on the 10-year Treasury have climbed to 2.7%, the highest level since early 2014.
What seems to be driving this dynamic is fear in the bond markets of end of the week data on the jobs market.
Today somebody in the Trump administration decided that the idea of the world’s biggest debtor nation talking down the value of its currency–as Secretary of the Treasury Steve Mnuchin did yesterday at the World Economic Forum in Davos–might be a bad idea. Overseas investors worried about a decline in the value of their dollar-denominated Treasuries would be certain to demand higher yields just as the Treasury was scheduled to sell $1 trillion in new Treasuries in 2018. So this afternoon President Donald Trump told CNBC that he favored a strong U.S. currency.
The dollar continued its fall today after European Central Bank president Mario Draghi voiced minimal concern over the rise in the euro. That currency topped $1.25 for the first time since 2014. The MSCI Emerging Markets Currency Index jumped 0.9%, its biggest leap in more than a year.
The yield on the 10-year U.S. Treasury climbed 7 basis points today to 2.55%. That’s the highest yield since March. That prompted bond guru Bill Gross to declare that we have entered a confirmed bear market in bonds with the upward trend lines of 25 years broken for 5-and 10-year Treasuries.
