US 10-year Treasuries have sold off heavily overnight with the yield rising 14 basis points to 2.28%.
Rates across the rest of the developed world also rose. Australian 10-year bonds are likely to open this morning above 3% and Bunds in Germany sold off another 7 points overnight to close the session at 0.62%. That’s a long way from the all time low of 0.049% less than a month ago. UK, Italian, French and Spanish bonds all rose in European trade while Brazilian rates increased during the US day.
These moves come without any obvious overnight catalyst other than this week’s Treasury auctions. The moves do come just a few days after Fed Chair janet Yellen warned that both stocks and bonds – particularly bonds – are overvalued.
“I would highlight that equity-market valuations at this point generally are quite high. Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there,” Yellen said in answer to a question at an IMF talk last week.
It was as clear a sign as we’ll get before the actual Fed tightening, which is widely anticipated later this year, that Yellen and her FOMC colleagues are preparing the market for a change in interest rates.
But, what Yellen is trying to avoid, by signalling and being as transparent as possible about the change in policy, is a repeat of 2013’s “taper tamtrum”, in which bonds entered an extraordinary bear market when the Fed signalled it would need to scale back its bond purchases under the quantitative easing program.
The issue is that US 10’s are now challenging the downtrend in the rally from the “taper tantrum” highs.
A break of 2.31% could signal to technical traders that there has been a change in trend. But even fundamentals-driven portfolio managers and traders look at charts. A trend change is a big thing which will change the way they approach the market and could send 10-year yields in the US as high as 2.65%. As the global bellwether market for bonds, any weakness in US treasuries, as yields rise, will drag other markets higher.
Of course the trendline needs to break first before for the trend to change. But if it does there is going to be a big problem for stock traders too as rising bond rates can seriously undermine equity valuations across the globe.