The highest long-term Treasury yields in years are headed for a major hearing next week as investors place their bids for two risky auctions — right before the Federal Reserve’s potentially game-changing annual gathering at Jackson Hole.
A relentless Treasury-market selloff this month wiped out what was left of year-to-date gains that at one point exceeded 4%. Next week, the US Treasury will sell 20-year bonds and 30-year inflation-protected bonds, demand for which is notoriously unpredictable. If investors shy away, even higher yields will be needed to lure them back.
The pain is registering acutely for bondholders, with a Bloomberg index comprised of Treasuries maturing in 10 years and more slumping 5.7% so far in August, on course for its worst month since September.The coming week’s auctions are particularly worrisome because 20-year bonds and 30-year TIPS have smaller investor bases than other Treasury products, so demand will be closely followed for any hint the current rout is nearing an end, or perhaps has further room to run.
A hawkish tone from Chair Jerome Powell Friday will likely test a bond market that still retains faith in rate cuts arriving next year. It’s a belief that explains why many fund managers favor owning the five-to-10-year area of the market, according to positioning surveys. “The question of how much term premium needs to be priced is the big one,” Matthew Raskin, head of US rates strategy at Deutsche Bank, wrote in an email. “Some of the term structure models Fed staff use still have historically low longer-dated term premia, which seems ... wrong.”For Meghan Swiber, director of US rates strategy at Bank of America, the focus is on whether a resilient economy means the Fed’s current long-run policy rate estimate of 2.5% should be adjusted higher.
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