I wouldn’t call it the consensus yet, but financial market thinking seems headed toward a belief that the end of the Fed’s $120 billion a month in purchases of Treasuries and mortgage backed assets won’t be a big deal. Certainly not enough to upset the bond market or produce another temper tantrum. The belief hinges on forecast of demand and supply that sees them roughly in balance even after the Fed stops its buying. An end to Fed purchases would be a significant hit to demand. But it looks like the U.S. Treasury will be cutting back on bond auctions as about the same time. And that would leave demand and supply roughly where they are now.
No change. But change coming someday. (Not soon, though.) That was the message from today’s meeting of the Federal Reserve’s Open Market Committee.
Special Report: Fixed income investing is facing a crisis–3 tactics and 7 picks so you can fix your income investing crisis–Part 2, The first (of three) buckets
Today, I’m going to begin to give you specific picks so you can start to fill out the three buckets I recommended in Part 1 of this Special Report. Filling the long-term bucket is probably the most fun–who doesn’t like imagining the wealth that will roll in from finding the next Nvidia (NVDA) or from investing in the current Nvidia. The short-term bucket is the most challenging since it requires you to confront the current paucity of assets throwing off yields of even 2% head on.But let’s start there since the other buckets hang off the short-term bucket.
The rise in the long end of the Treasury market resumed this week after inflation expectations hit a multi-year high. The Federal Reserve didn’t help. After its Wednesday meeting Chair Jerome Powell stressed that the central bank views any jump in price pressures as fleeting and it won’t be dialing back crisis-level monetary support any time soon. Short interest in the $12 billion iShares 20+ Year Treasury Bond ETF (TLT) rose to 25% of shares outstanding this week. That’s the highest level since early 2017, according to data from IHS Markit. Investors and traders continue to dump the long Treasury and the ETF: the iShares 20+ Treasury ETF has posted outflows every day this week, putting it on track for weekly withdrawals of over $1 billion. According to Bloomberg that’s the worst stretch since November. The ETF is down 12% in 2021.
Nothing to see here. Move along. In the minutes from its March 16-17 meeting, released today April 7, Federal Reserve officials told the financial markets “that it would likely be some time until substantial further progress toward the [Open Market] Committee’s maximum-employment and price-stability goals would be realized.” And, the minutes went on, “a number of participants highlighted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases.”
Where are long Treasuries headed? In the short term, I’d expect a bounce, but I think the trend is still down for 2021
It worries me when any asset moves too quickly–either up or down. Long-term rallies pauses for a breather from time to time. So do big moves to the down. Like that we’re seeing at the long end of the Treasury bond market right now. The yield on the 10-year Treasury closed at 1.71% today, up another 7 basis points on the day. And now up 42 basis points in one month.
The rotation gets extreme–Dow hits record intraday high while NASDAQ Composite falls into a correction
Two indexes will tell you what you need to know about today’s stock market action. The Dow Jones Industrial Average, driven by cyclicals, vaccine recovery, and consumer stocks rose to an intraday record high. After a slight retreat at the end of the session, the Dow finished ahead 0.97% on the day. The NASDAQ Composite, on the other hand, weighed down by technology and growth momentum stocks dropped 2.41% on the day to fall into a full correction from the February 12 closing high.
At 3:30 p.m. New York time today, March 3, the yield on the 10-year Treasury was 1.47%. That’s up from yesterday’s 1.42%. So much for any thoughts that yesterday’s rally in bonds and drop in yields might be the beginning of a larger move.
Don’t expect too much movement from stocks in the next couple of days–there’s just too much news due on Thursday and Friday
Stocks are neither moving ahead to follow up on yesterday’s big gains. Nor selling off under the wave of profit taking. Given the news calendar on Thursday and Friday that’s about what I’d expect. We’re due for a bushel of potentially market-moving news on those two days. And I’d be surprised if anyone wants to get too far ahead of those announcements.
The odds are that the bond market will snap back this week as traders decide that the drop in the price of the 10-year Treasury (and the climb in yield) has been too far and too fast. (A drop in Treasury yields would be likely to send stocks higher, reversing the trend of the last week.)I don’t think that reverses the trend beyond a week’s bounce, however. The $1.9 trillion coronavirus stimulus/relief bill still scares the bond market with the possibility of an uptick in inflation (finally) and the possibility that the package migh work and actually put the economy on the path to a sustained recovery. (And why might that be a bad thing, you ask: Because a clearly sustained recovery would incline the Federal Reserve to end, or at least scale back, its monthly purchase of $120 billion in Treasuries and mortgage-backed securities.)On Friday the yield on the 10-year Treasury fell to 1.40% as bond prices rose. That was an 11 basis point drop on the day and it could well be a harbinger of a bounce for Treasuries this coming week.
Yields on U.S. Treasuries hit 1.61% early today before pulling back slightly to 1.51% as of 3 p.m. New York time. It’s not just the rise in yields or even the magnitude of the increase that has so disconcerted the bond market today, February 25. It’s the speed of the move. As of 3 p.m., the bond market was looking at a 14 basis point increase in yields just today. That’s a huge move for the normally slow-moving bond market.
Trick or trend: Here is some of what’s driving yields higher (and prices lower) on 10-year Treasuries–besides Biden’s big spending plans
Simple rules of supply and demand say that plans by the Biden administration for a $1.9 trillion package of coronavirus stimulus/relief and proposals to spend another $2 trillion on infrastructure should be driving up yields on government bonds (and driving down prices.) Investors want more reward–higher yields–in return for buying more Treasuries and taking on the risk that all this supply will push Treasury prices lower. But the bond market is hardly ever as simple as it looks and there are other trends at work that you ought to figure into your investment calculations.