Longer dated Treasuries are continuing to sell off. The 10-year Treasury is at the highest level since October 2007 while the thirty-year Treasury is at a level last seen in April 2011. Shorter dated debt, defined as two years or less have remained in a tight trading range of 4.90% to 5.10% during the selloff, causing the yield curve to steepen considerably.
Several bulge bracket firms including BMO and Citi believe yields on both the 10 and 30-year Treasury could rise as much as 50 to 75 bps before the end of the year as the markets demand a greater duration premium.
Even if yields broach the 5.0% to 5.25% range, longer dated Treasuries are still trading at a considerable discount to historic trends based upon current and expected inflation as well as spreads over the Federal Funds rate. Yields on longer dated debt should have a “mid to high six handle” according to bond legend Bill Gross.
As widely discussed, the 2022 losses in Treasuries were historical and there is a strong probability that 2023 will be another down year for the UST, its third consecutive negative performance, which would also be a record.
If yields trade to levels suggested by Gross, additional losses for longer dated Treasuries would be comparable to those experienced in 2022.
For what it is worth department, the largest long dated bond ETF…the 20 Year + Treasury Bond ETF or TLT…has lost 48% from its 2020 all-time high and is trading at its lowest point since 2011 according to Bloomberg.
Equites are stumbling on the rise in longer dated Treasuries. Bloomberg writes “the S & P 500’s rally this year has been built on shallow breadth, driven by a select number of technology stocks and the AI frenzy.” Bloomberg further writes the difference between these handful of stocks and the rest of the market is at “historical proportions,” however the data only goes back to 2010.
Bloomberg further opines a further rise in rates could cause valuations to falter especially if “earnings of this select few do not materialize.”
Commenting about the possible government shutdown, Moody’s stated that such would reflect on America’s credit rating, the only remaining major credit grader to assign the US a top rating.
Moody’s commented:
While government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of US institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years.
In the wake of the Federal debt ceiling “brinkmanship” earlier this year, a government shutdown would demonstrate the significant constraints that intensifying political polarization continue to put on US fiscal policymaking during a period of declining fiscal strength, driven by persistent fiscal deficits and deteriorating debt affordability.
If Moody’s does downgrade the debt, will it affect yields?
What will happen today?
Last night the foreign markets were down. London was up 0.04%, Paris down 0.72% and Frankfurt down 0.67%. China was down 0.43%, Japan down 1.11% and Hang Seng down 1.48%.
Dow and NASDAQ futures are down 0.25% and 0.50%, respectively on monetary and fiscal policy fears. Jamie Dimon, CEO of JP Morgan floated the idea that interest rates could reach 7%, a worst-case scenario that could catch many off guard. Dimon did not specify what part of the yield curve but such abomination is similar to that of bond legend Bill Gross. The 10-year is up 4/32 to yield 4.51%.
