Five metrics bond investors are watching as Covid fears return

Return on 10-year benchmark US Treasury, the ratio moves inversely to bond prices, which recently stood at 1.28% on Friday, after falling to a low of 1.128% earlier in the week, nearly 65 basis points below the 2021 high due to worries worried about slowing growth and the spread of Covid-19 infections.

Inflows into the iShares 7-10 year Treasury bond ETF reached about $1.2 billion in the week ending July 21, the highest level in a year according to Lipper, illustrating demand for the bond. goverment American.

One of the key questions currently hanging in the markets is whether Treasury yields will continue to move towards the 1% level – revisiting the levels they touched during the pandemic – or recover towards 2. %, a level that many participants expected to see by the end of the year.

Here are a few indicators that investors are watching to determine where the Treasury market is going:

STORY OF TAPERING
The Federal Reserve surprised many market participants with a hawkish turn at its June policy meeting, with the so-called dot indicating some officials are raising expectations for a rate hike. their first capacity until 2023.

With the Fed’s policy meeting ending July 28 and the central bank’s annual symposium in Jackson Hole scheduled for late August, investors will be watching for signs that Officials are backing up with assurances that the current bout of inflation is temporary, a message that could rock markets.

Investors will also be looking for signals on whether officials believe the Delta variant of Covid-19 could pressure growth, potentially delaying the lifting of easy-money policies. Fed and lower yields or not.

YIELD SPREADS
While Treasury yields fell, the spread between Treasuries and high-yield bonds remained flat. That suggests some investors remain optimistic about the economy as a whole, while short-term factors like location and supply are driving the upside momentum in Treasuries, said Jonathan Golub, chief equity strategist. United States in Credit Suisse, in a report.

SHORT INTEREST
Leveraged funds – including hedge funds – have placed bearish bets on US Treasuries as part of so-called discount trading, which has seen investors desiring lower yields and buy shares of companies that could benefit from a strong rebound in growth.

Data from the Commodity Futures Trading Commission showed that, while net speculative bets on 10-year Treasury notes contracts were in the week ending July 13, bets on futures Others, including 30 years, are still down, data from the Commodity Futures Trading Commission shows.

A reversal in that positioning could boost Treasury yields and drag yields lower.

ECONOMIC DATA
While the economy continues to bounce back from last year, concerns that growth is slowing contributed to the Treasury rally earlier this week.

Citigroup’s US Economic Surprises Index, which measures how data is beating or missing economists’ forecasts, stood at 11.6, compared with a record high of 270.8 hit in 2020.

Praveen Koropaty, US interest rate strategist at Goldman Sachs, believes the Fed will want to see the jobs reports from July, August and September before pledging to cancel its easy monetary policies.

At some point in November or December, “the Fed is going to announce a cut and I don’t think the market will be surprised because it will be well informed,” he said.

BREAKFAST INFLATION RATE
The breakeven rate – the yield difference between Treasury bonds and inflation-protected Treasuries over the same term – is narrowing, a sign that investors are showing more confidence in the estimate. calculated by the Federal Reserve that high inflation will be temporary, writes Craig Johnson. Chief market technician at Piper Sandler.

“The movement in commodities and the retracement in the recovery momentum are giving additional credence to the Fed forecast,” he said.