Busy fighting the financial crisis six after it happened, regulators are doing an excellent job laying the groundwork for the next one as evidenced by the panicky action in Treasurys on October 15. It was on that morning when the 10-year Treasury yield in the space of a few minutes tumbled to 1.90% from 2.20%, before ending the session at 2.15% (for those who don't play in fixed-income, U.S. Treasury yields very rarely ever move that much).
The panic buying in Treasurys also leaked over into jumpy selling in stock index futures.
"It was like turning the clocks back to pre-electronic trading," says Charles Comiskey, head Treasury dealer at Scotiabank. "Once we recognized things started getting out of control, we shut [the electronic trading system] off immediately."
Laser-focused on forcing banks to cut back on risk, regulators have forced lenders to vastly scale down their inventory of bonds, and the thinner markets make outsized moves more likely. JPMorgan estimates the amount of Treasurys available to trade at one time without moving prices has plunged 48% to just $150M since April.
“There’s a thin line to keeping the customer happy while also giving a level that you can at least get out of without taking a big loss right away,” says Guggenheim's Jason Rogan, whose firm also shut off the machines that morning.
"Everyone is always saying rates will rise; it is almost comical,” says Jeff Gundlach, speaking at ETF.com's Inside Fixed Income conference. It's a mistake looking at past economic recoveries as a template for this one, he says, because persistent deflation - owing to a number of factors - makes this cycle different.
While the Fed realizes QE doesn't do a lot of good and is ending it, he adds, the central bank has no reason to hike rates anytime soon.
Gundlach never sticks with just fixed income, and this time he turns to oil, which he believes is headed far lower. "I'm convinced Saudi Arabia wants oil at $70. They love turning the screws on people who mean them harm in the Middle East." Seventy dollar oil, however, will also hurt the booming energy sector here in the States as fracking is hardly worth it at that price.
Wetting their fingers and sticking them in the wind, strategists at Goldman Sachs cut their year-end forecast for the U.S. Treasury yield to 2.50% from 3%, and those at JPMorgan to 2.45% from 2.7%. The moves come following a plunge in the 10-year yield over the past month - to 2.19% from 2.66%.
The revisions underscore what is becoming a nearly annual event where January 1 sees nearly all of the Street recommending investors shun long-term U.S. government paper, only to reverse themselves some months later (Goldman started the year expecting 3.25%, and JPMorgan 3.65%).
“We think anxieties about the ‘passage of the baton’ between the Fed and the ECB have increased," says Goldman's Francesco Garzarelli.
Kudos to the team at HSBC - about the only bond bull which could be found at the start of the year - which called back then for a year-end 10-year yield of 2.1%.
Another crazy day in bond land has the U.S. 10-year Treasury yield higher by one basis point to 2.15% after earlier falling all the way to 1.97%. Helping is some decent economic data (Philly Fed, jobless claims), and a turnaround in equities as both the Fed and ECB put out word - in case anyone forgot - of their willingness to step in to arrest just about any market decline.
Alongside a major reversal in stocks - with the Russell 2000 now higher by 1.3% and the Nasdaq back to flat - has been an even bigger turnaround in Treasurys.
The 10-year yield plunged all the way down to about 1.90% earlier this morning (from 2.20% yesterday) as "position squaring" in futures combined with some fixed-income bullish news and data to create a buying panic. The yield has now returned to 2.15%. Once up around 4% on the session, TLT is ahead just 0.3%.
The 10-year Treasury yield is quickly heading towards a "1" handle, off nine basis points this morning to just 2.11% after a trio of weak economic reports, led by core retail sales falling 0.2% in September vs. an expected gain of 0.3%.
There was also a big slump in the Empire State survey, and core PPI came in flat vs. an expected gain of 0.1%.
Down moderately earlier, S&P 500 (NYSEARCA:SPY) futures are now lower by 1.1%.
The 10-year Treasury yield falls all the way to 2.19% in morning action, a fresh 16-month low, and the 30-year yield has fallen below 3%.
Just for perspective, the yield on one of the world's more hated asset classes (the 10-year Treasury) stood at around 3% at the start of the year. The TLT ETF has gained 18.6% YTD and is up another 0.9% premarket.
At work in addition to sliding equity markets are rising deflation fears across the pond - the German 10-year Bund yield slides five basis points to a fresh all-time record low of 0.80%, and 10-year Gilt yields are down eight basis points to 2.09% amid weak CPI numbers.
The 10-year U.S. Treasury yield has carved out new lows for the year, down another four basis points today to 2.28%, its lowest level since the summer of 2013.
Yesterday's FOMC minutes suggested members may be more cautious than previously thought on hiking rates, but yields were headed south well before that news.
The major rally in European government bond prices continues alongside, with the yield on the German 10-year Bund down another five basis points to a record-low 0.82%. Spanish 10-year yields are off six bps to 2.04%, and Italian yields are down 7 bps to 2.27%. In the U.K., 10-year Gilt yields are lower by six bps to 2.21%.
Japan continues as the beacon, with 10-year JGB yields down another two basis points to 0.49%.
The 10-year Treasury yield declined all summer, but that was wiped away in the three weeks following Labor Day as it shot higher to about 2.62%. With today's four basis point decline to 2.38%, that September advance has now been erased.
The impressive move down comes against a backdrop of a FOMC seemingly intent on hiking rates by early next summer, and last Friday's employment report showing the unemployment rate falling all the way to 5.9%.
Amid the handy excuses for headline writers are slipping stocks - the S&P 500 is down about 0.5% - German 10-year yields are all the way down to 0.87%, and the IMF cutting its global growth forecast.
The headline unemployment rate has fallen to 5.9% well ahead of Fed projections, and the broader U-6 rate is falling even faster. Payrolls are 2.7M higher today than a year ago, the largest 12-month increase since March 2006.
"This leaves officials with some challenging decisions at their policy meeting Oct. 28-29," says Hilsenrath, beginning anew the debate about whether "considerable time" will be removed from the FOMC policy statement. If it doesn't happen this meeting, look for it on Dec. 17th, as that's when we'll get updated economic forecasts as well as a post-meeting press conference from Janet Yellen.
The 10-year Treasury yield is up four basis points to 2.47% and futures markets are pricing in a rate hike in June of 2015.
Up at 2.54% earlier this morning, the 10-year Treasury yield retreats to 2.48% following weaker-than-expected prints from Case-Shiller, Chicago PMI, and Consumer Confidence.
Of Consumer Confidence - which dropped to 86 in September from 93.4 - The Conference Board's Lynn Franco notes a recent softening in economic growth and less positive assessment of the job market (did anybody tell the Fed?). The Expectations Index fell to 83.7 from 93.1.
"Concerns over his abrupt departure are weighing on Treasury prices," says Tom di Galoma, head of fixed income rates at ED&F Man Capital Markets; the fear is that Pimco's clients will redeem, forcing Pimco to liquidate Treasury bonds.
Gross manages the $221B Pimco Total Return Fund, the world's largest bond fund by assets, which held 41% of its investments in U.S. government-related holdings, a proxy for Treasury bonds, at the end of August.
Bond prices are mostly snoozing through the August New Home Sales report showing sales of single-family homes surging 18% to a six-year high of 504K (seasonally adjusted annual rate). Expectations had been for a pace of 426K. The 504K print is 33% higher than August one year ago.
Also ignoring the volatile number and instead focusing on weak results from KB Home, the ITB is lower by 0.8%.
The 10-year Treasury yield has actually dropped nearly two basis points since the print, now flat on the session at 2.53%. TLT flat.