On Sunday evening we noted that this is set to be an “interesting” week for bond traders who are staring down a veritable minefield of potentially market-moving events including PCE, ECI, a Fed meeting, a Treasury refunding announcement, and the jobs report.
You can read all the super-exciting details here (although I guess that characterization depends on how you define “super-exciting”), but suffice to say there’s a lot to digest at a time when Treasurys are already having their worst year in risk-adjusted terms on record and when everyone from Ray Dalio (who doesn’t want you to rear-end a semi truck) to Bill Gross (who is tired of being criticized for not putting the toilet seat down), swears we’re already in a bear market.
Well overnight, folks went ahead and got a jump on things, as 10Y yields rose more than 6bps to above 2.72, the highest since April 2014.
This started pretty much immediately on Sunday evening when futs volumes jumped after stops were triggered below last weeks lows.
on the move.. Treasury Futures’ Volumes Surge After Taking Out Last Week’s Low
— Walter White (@heisenbergrpt) January 29, 2018
“Bearish sentiment is so deeply embedded that the approach of month end doesn’t seem to be a concern for shorts,” Bloomberg’s Mark Cranfield wrote.
In a break with recent precedent, this finally helped the dollar, which rose overnight against all of its G10 peers. “The higher Treasury 10-year yield is spurring dollar buying,” Ko Haruki, head of the financial solutions group at CIBC World Markets told Bloomberg, adding that “the dollar is consolidating with major currencies failing to break Thursday’s highs.”
Needless to say, the default reaction will probably be to fade any dollar strength considering the circumstances.
More generally, the question is how long before rising yields throw markets for a loop? As one strategist we spoke with on Sunday noted, “if breakevens get us to 3%, there could be some volatility.”
On that note, we’ll leave you with a quick excerpt from SocGen’s Kit Juckes:
I may as well get an early vote in for ‘boiling frogs in rising yields’ as the next market theme. A slow-motion rise in bond yields is not, yet, threatening risk sentiment in equities, credit or EM. As long as it doesn’t, yields can rise on a tide of decent economic data and expectations of higher inflation thanks in no small part to rising oil prices. The frog analogy (it doesn’t realise it’s getting boiled until it’s too late to escape) is likely to be popular in 2018. For now, we’re basking in synchronised growth and thinking happy thoughts…..