Biggest Bond Rally in a Year Stalls With Short Wagers Washed Out
The most torrid Treasuries rally in a year is likely set for a breather as traders reassess their rush to abandon reflation bets with some potentially decisive events looming in the coming days.
The 10-year yield, a benchmark for global borrowing costs, tumbled almost 20 basis points over the past two weeks, to 1.36%, in part as the rise of dangerous Covid-19 variants fueled an unwinding of short positions. It’s been a stunning stretch for a market that was flirting with a 2% yield on 10-year notes just a few months ago, and is now gauging the prospects for a march back toward 1%.
Traders say there’s a strong case for a pause. For one thing, options are signaling a wash-out of short bets. Then there’s next week’s calendar: a combined $120 billion of Treasury note and bond auctions, forecasts for another big U.S. inflation figure, and testimony by Federal Reserve Chair Jerome Powell. What’s more, yields failed to tumble below a key level that may prove difficult to crack right away.
“We could still make a hard run to 1%, but with inflation data coming out next week and auctions -- including supply in the back end of the curve -- we think this is a good fade opportunity,” said David Brownlee, a portfolio manager at Maple Capital Management Inc. in Montpelier, Vermont. “The technical objectives have pretty much been met now.”
The 10-year briefly sank below 1.25% on Thursday, down a bit more than 50 basis points from its 2021 peak in March. The yield also bounced off its 200-day moving average, a measure it’s held above since November.
The past week’s rally was a headscratcher for some, with many strategists pointing to a shakeout of positioning for higher yields as a catalyst, one that may be exhausted.