A fresh bout of bond turmoil rippled across markets Friday, as Treasurys sold off on no obvious catalyst. Initially, traders pointed to a technical breach as the possible cause.
Apparently, a block sale into a thin market triggered a break of Thursday’s lows in 10-year notes, which “prompted heavy-selling flows,” Bloomberg recounted, adding that weakness in Aussie bonds into the close likely contributed, as did put option hedging.
Although the market was able to digest supply this week with relative alacrity, including the long-bond sale Thursday, Bloomberg’s Stephen Spratt noted that late pricing of Verizon’s multi-part deal weighed on futures, which “traded sideways in poor volumes before the sudden surge” that ultimately triggered the abrupt move higher in cash yields.
And then there’s the macro backdrop. Stimulus is imminent and Joe Biden’s address to the nation on Thursday evening included an aggressive vaccination timeline. July 4 celebrations in the US could be a semblance of normal this year.
“There was no definitive trigger [for the pressure on Treasurys] other than the usual suspects of reopening optimism, supply indigestion, and SLR expiration jitters,” BMO’s Ian Lyngen and Ben Jeffery said, noting that primary dealer holdings data as of March 3rd did show a record $64.7 billion decline in Treasury holdings, which could stoke more concern about the SLR overhang.
“The lack of any obvious impetus for the overnight weakness suggests there is a large positional and technical component to the move,” Lyngen went on to say, before expressing some skepticism that “this is entirely a classic episode of supply indigestion characterized by dealers shedding bonds in a position-squaring exercise, although there is undoubtedly a component of that at play.”
Ultimately, the 10-year moved through 1.60%, and that was insult to injury for tech shares, which were already reeling from a fresh crackdown on Tencent.
China’s State Administration for Market Regulation fined the company 500,000 yuan for a three-year-old investment in an online education app. As part of the same action, Baidu was hit with a matching fine for a 2014 acquisition. As it turns out, they didn’t get the proper regulatory clearance. The fines are part of China’s increasingly aggressive clamp down, orchestrated under the umbrella of an anti-monopoly push. Beijing analyzed 10 acquisitions. Unsurprisingly, all 10 were found to constitute a violation.
More disconcerting, sources told Bloomberg that Tencent may be next in line for the Jack Ma treatment. “The token fine is just the beginning. China’s top financial regulators see Tencent as the next target for increased supervision,” a Friday article said. “Like Ant Group, Tencent will probably be required to establish a financial holding company to include its banking, insurance and payments services.”
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This comes at a particularly inopportune time. Tech shares in Hong Kong recently fell into a bear market, and China’s expanding crackdown will almost invariably add to the pressure, dip-buyers or no.
Tencent was hammered Friday, as was Naspers, whose fate is tethered to the company.
Analysts will likely attempt to play down the impact on Tencent, but the truth is, nobody knows what the impact might be, because nobody can be sure how aggressive Beijing intends to get in its efforts to rein in big tech.
This confluence of factors (a technical surge in US yields and Tencent jitters) was bad news for US tech Friday. European curves bear steepened and bund yields were higher, taking their cues from Treasurys, despite the ECB’s plans to step up PEPP purchases.
10-year US yields did appear to stall around 1.60%. “US Treasury yields are still setting the tone,” Rabobank’s Piotr Matys said. “That said, [they] face a strong technical barrier [and] it’s reasonable to assume that this area should hold and prevent a further squeeze towards 2%.”
“It isn’t easy to get away from the idea that you should be selling any rally in fixed income at the moment,” AxiCorp’s Stephen Innes remarked. “This morning’s selloff in USTs seems to have come from nowhere.”
As I put it Thursday, while documenting tech’s rally and the extent to which Treasurys had cleared this week’s known hurdles,
“Out of the woods” is everywhere and always a perilous phrase. No matter the context, it invokes an almost instinctual rejoinder, also involving timber: “Knock on wood.”
