Soaring U.S. government bond yields sent shock waves across global markets in September. Now, yields have started October by pushing even higher, threatening to upend markets and the economy.
Signs of stress in the Treasury market abound. As prices across the bond-market have slumped, some long-dated Treasury securities have been trading below 50 cents on the dollar. Moreover, a popular exchange-traded fund tracking U.S. government debt that matures in 20 years or longer cemented its lowest close on Monday since 2007.
Bond yields move inversely to prices, so rising yields means prices are falling. The rise in yields to their highest levels since before the 2008 financial crisis has stirred up worries that more banks might fail, like Silicon Valley Bank and Signature Bank did back in March.
The first trading session of October got off to an ominous start, with the yield on the 10-year Treasury note BX:TMUBMUSD10Y marching 11 basis points higher to 4.682%, the highest level since Oct. 12, 2007, according to Dow Jones Market Data.
That has Wall Street strategists, including Victor Cossel, a senior macro strategist at Seaport Research Partners, warning that bond-market pain could continue until something changes — or something blows up.
The Federal Reserve also could change the narrative by signaling it’s rethinking its “higher for longer” forecast for short-term rates unveiled at its September meeting. But there’s also the risk that “something breaks,” potentially another U.S. bank looking vulnerable to collapse. A team of top economists at Goldman Sachs warned clients last week that it’s time to worry about banks’ stability again.
“We do not expect an end to the trend of rising yields and a?stronger U.S. dollar until there is a monetary or fiscal inflection, and/or a growth scare stemming from worsening economic data,” Cossel said.?
With that in mind, here are four charts showing the recent chaos in bond markets.
1. Less inverted yield curve
Until recently, yields on short-dated Treasury securities like the 2-year Treasury note BX:TMUBMUSD02Y were rising much faster than their long-dated peers. That pushed the Treasury yield curve — a measure of the difference in yield between short-dated and long-dated Treasurys — into deeply negative territory.
The phenomenon, which has persisted for the longest stretch since the early 1980s, is considered a reliable signal of recessions. It also emerged as byproduct of the Federal Reserve’s aggressive interest-rate hiking campaign. Now, however, longer-dated yields have been making a comeback since the central bank began signaling it may be finished, or is nearly done, hiking its policy rate, while also telegraphing that interest rates could stay north of 5% for longer than investors had expected.
As a result, the spread between 2-year and 10-year Treasury yields has reached its narrowest point since May 4, according to Dow Jones Market Data.
2. MOVE index is move-ing again
The ICE BofAML MOVE Index is a gauge of implied volatility in the Treasury market, similar in some ways to Wall Street’s “fear gauge,” or the Cboe Volatility Index VIX, which measures the S&P 500’s SPX implied volatility. The MOVE index is supposed to measure how volatile investors expect bond markets will be.
While below the March highs, when bond yields whipsawed following the collapse of Silicon Valley Bank, the MOVE index has been creeping up again, driven by September’s bond-market selloff.
Some strategists think the MOVE index could continue to climb before yields peak, and start heading lower once again.
3. A popular bond-market ETF fell to a 2007 low
The iShares 20 Plus Year Treasury Bond ETF TLT is a popular U.S.-traded bond-market ETF, with nearly $40 billion in assets under management.
It has been caught in a powerful downtrend as its tracks long-dated Treasury bonds that have endured the brunt of recent selling. The ETF logged its lowest close since August 2007 on Monday when it finished at $86.93, according to Dow Jones Market Data.
Of note, buyers have jumped at the opportunity to buy the dip. According to fund flows data from FactSet, the ETF took in more than $900 million during the week ended Sept. 29, its biggest weekly inflow since July, and second-biggest this year.
4. 30-year Treasurys trading at 45 cents
While investors buying newly issued Treasury bonds will be able to take advantage of higher yields, holders of low-coupon debt issued a few years ago are seeing the market value of their bonds decline, sometimes precipitously.
Enter the 30-year Treasury bond BX:TMUBMUSD30Y issued in the spring of 2020 with a coupon of 1.25%. According to FactSet data, it’s trading at 46 cents on the dollar, the lowest price in its history.
For investors like banks and insurance companies that likely bought similar bonds when they were first issued, that would translate to a paper loss of more than 50% on a supposedly supersafe government bond, if they were forced to beaten-down securities in the open market.
The Federal Reserve in the midst of banking turmoil in March rolled out a powerful emergency lending facility so that banks could raise liquidity by pledging underwater Treasury and government-backed mortgage securities to it, without having to take a loss.
The program is set to run through March 2024, unless it is extended. It has been credited with helping reduce the threat of a broader banking crisis.
Still, Treasury yields finished higher once again on Monday. Unless they see a dramatic rally before the end of the year, longer bonds issued by the U.S. government are on track to post an unprecedented third-straight annual decline, according to BofA Global.
Surging yields also have been blamed for weighing on stocks, with the S&P 500 finishing little-changed Monday as investors shrugged off a deal to avert a government shutdown.
Now, in the frequently volatile final quarter of 2023, one thing seems likely: ructions in the U.S. bond market probably aren’t over yet.