The benchmark 10-year Treasury yield slid to a one-month low Thursday in a counterintuitive move that should be a positive for the stock market.
Treasury yields, which move opposite price, had been falling, but they picked up momentum after two early morning economic reports on Thursday. One was March retail sales, which jumped nearly 10%, and the other was weekly jobless claims, which fell to 576,000 — the lowest level since the early days of the pandemic.
Strategists said the bond market was beginning to price in a peak for economic growth, expected to be as much as 10% this quarter. It also was responding to news of possible Japanese buying in Treasurys, as well as some worry about Covid.
The 10-year yield fell as low as 1.53%, before coming back to 1.57%. A basis point is equal to 0.01 percentage points. The market watches 10-year Treasury closely because it influences mortgage rates and other consumer and business loans.
Thursday’s move in the bond market is the opposite of what might normally be the case.
Generally, very good news on the economy would have triggered a fear that the Federal Reserve would be comfortable raising interest rates, and yields would hold at higher levels or rise further. Stocks rallied on the reports, as investors took them as good news.
Andy Brenner, head of international fixed income at National Alliance Securities, said there are a number of reasons for the move lower in yields, but he views it as temporary. “I’m not changing my view of higher yields later in the quarter,” he said. “This is good for stocks for now.”
Some strategists said the bond market may be moving into a period in which it trades in a range instead of moving to new highs or heading sharply lower.
Treasury yields’ relationship with stocks
Treasury yields had been a source of volatility for stocks before this month. The abrupt run-up in the 10-year — from under 1% at the end of 2020 to a high of 1.77% at the end of March — jolted the stock market. Investors feared interest rates would keep rising, stealing investment dollars from stocks.
Strategists said the move lower amid strong data was being viewed as a sign that the market was now looking at those statistics in the rearview mirror.
The yields had been moving higher on expectations for a very strong second quarter and economy in general. Stimulus spending and the amount of debt needed to pay for it also influenced the climb in yields.
“Number one, we’re delivering into high expectations for data…This was the way the market thinks about it. If it’s strong now, it’s taking from the next one. In the second quarter, we’re going to get peak data and we’re going to get peak fiscal stimulus spending,” said Jim Caron, Head of global macro strategies on the global fixed income team at Morgan Stanley Investment Management.
“Third quarter will be strong, but it will be weaker than second quarter,” he said.
In terms of data, “the rate of change starts to go the other way. You start to say well around 1.7% [10-year yield] is probably not a bad place to get long,” Caron said.
He said it could mean less volatility, and that would be good for stocks and other assets.
“I think we can enter in a range as the Treasury market is notorious for doing. It can sit in a 20 basis point range for months,” Caron said.
Concern around the pandemic
Brenner of National Alliance Securities said one reason yields are moving lower is concern about Covid cases increasing and the trouble with the Johnson & Johnson vaccine slowing the path to herd immunity.
He said news about the vaccine, which was paused for blood clots in six patients, could raise overall concerns about the safety of vaccines, particularly among parts of the population that are already inclined to oppose them.
But Brenner said that’s just one factor. “I think you were able to get the 10-year below the 1.60% level and that caused an acceleration,” he said.
“Bonds are doing better because they’re viewing the economy as possibly slowing. Stocks are doing better because interest rates are going lower and the economic numbers, which are backward looking, are really good,” Brenner said.
He said hedge funds have also been pushing yields lower, after covering shorts in the 1.70% to 1.75% area. Another big area for shorts is 1.345%, Brenner added.
He said the 1.47% level should act as a floor, and strategists note that the 1.50% level is psychological support. But Brenner expects the period of yields heading lower will be short-lived.
“The Covid stuff will take the back burner and the vaccines will get ahead of it. You had a window that allowed hedge funds to push the market,” said Brenner.
Ian Lyngen, head of U.S. rates strategy at BMO, said another reason for the buying spree in Treasurys was prompted by a Japan Ministry of Finance report.
“If you look at the [Ministry of Finance] data, which came out overnight, we see the week ended April 9 the Japanese bought more than $15 billion in overseas notes and bonds. The market is assuming the vast majority of that was allocated to U.S. Treasurys,” he said.
“This also occurred at a period when the market was losing bearish steam,” Lyngen said. “We stopped trading strong data toward higher rates. That has let rates simply drift lower.”
Treasurys also passed another test this week, with a series of big auctions. The 10-year was auction was Monday. “They bought $38 billion at 1.68%,” Brenner said. “You’ve got a 14.5 basis point profit.”