Bonds Reclaim Limelight As Yields Hit Fresh Pandemic Highs

The Treasury selloff showed signs of wanting to extend on Tuesday, as bonds looked poised to reclaim the limelight ahead of Joe Biden’s next fiscal unveil and (Good) Friday’s all-important NFP report.

10-year US yields rose through 1.75%, triggering selling flows that helped push the 2s10s to the widest since 2015. “Breaks of key levels appear to have fueled stops outs of long positions,” Bloomberg’s Stephen Spratt said.

Ultimately, Treasurys ended off the lows, as 10s retraced and the long-end rallied, bull-flattening the curve. Still, benchmark US yields are on the verge of posting their largest quarterly rise in years (figure below).

“Vaccine renormalization plus fiscal stimulus now circulating into the ‘real economy’ is now getting an anticipatory third boot to the face via the expected large upside surprise in Friday’s NFP data now increasingly being priced in, especially as [the] release comes dangerously on the illiquid Good Friday holiday-shortened session, risking a disorderly move,” Nomura’s Charlie McElligott wrote.

Biden on Monday said 90% of US adults would be eligible for a vaccine within three weeks, and that most Americans would likely be able to receive their shot within five miles of their home. That underscored the “normalization” narrative, and probably added to the bearish impulse in bonds at the margins. 10s ended Tuesday around 1.72% after Treasurys pared losses.

Bunds, meanwhile, eyed inflation and confidence data. Europe’s economic confidence indicator jumped to 101 this month, well ahead of an expected 96.

“The deflationary impact of the pandemic is now disappearing quite rapidly and inflation is likely to touch 2% in the course of 2021,” ING said, in a quick reaction piece commenting on the upside surprise shown in the visual (above). “Whether this is the start of an upward trend is far from sure,” the bank added, noting that “some of the strains in supply chains will disappear in the course of the year, and energy prices are not expected to rise significantly further.”

Reflationary “vibes” notwithstanding, Tuesday’s initial move higher in yields lacked a readily discernible catalyst, which perhaps explains why it was eventually faded.

“We wonder to what extent the rise in safe haven yields is reflective of heightened uncertainty potentially underpinning a rise in term premia… perhaps explained by jitters [around] the announcement from Biden [on] his infrastructure stimulus plan, an issue which is understandably of keen importance for USTs and which is beset with crucial known unknowns in terms of both its size and the manner in which it will be funded,” Rabobank’s rates team remarked.

BMO’s Ian Lyngen and Ben Jeffery captured it well when US 10s were up around 1.77%: “Peaking blindly.”

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