Stocks Close Lower As Renewed Bond Selloff Puts Street On Edge
Comment of the Day

May 11 2015

Commentary by David Fuller

Stocks Close Lower As Renewed Bond Selloff Puts Street On Edge

There's "cautiousness as a result of traders watching rates back up to 2015 highs. That's certainly having a limiting effect on gains," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management (U.S.). He noted the absence of major market-moving news and economic reports on Monday and Tuesday. 

The U.S. 10-year Treasury yield gained to 2.27 percent. The 30-year bond yield topped 3.03 percent. The German 10-year bund yield rose to 0.62 percent.

"It's a relatively low volume trade. It's not capitulation as much as it is reluctance to stand in front of the move," Ian lyngen, senior treasury strategist at CRT said of the bond market movements.

"We are challenging the high yield level seen last week and I think a basic concession ahead of the refunding auction doesn't explain it," he said. The Treasury auctions 3-year notes tomorrow, 10-years on Wednesday and 30-year bonds Thursday.

"The selloff in Treasurys is outpacing the selloff in bunds today," he said, adding that Mondays are notoriously low liquidity days.

But traders said many of the factors from last week were still at work, and the Treasury market selloff came after prices were lifted (and yields fell Thursday and Friday).

David Fuller's view

After a 35-year bull trend it is understandable why commentators on the US bond market are publicly calm about the current rise in yields.  Previous warnings have looked like howling at the moon.

I would take a warning from Fed Chair Janet Yellen more seriously than anyone else on this topic, which is why my lead item on Wednesday May 6th focussed on her comments.  Here is a key sentence:

Yellen said bond yields “could see a sharp jump” when the Fed raises its benchmark interest rate. 

Some bond traders are not waiting for that rate hike, which is hardly surprising.  Their selling resumed today, as you can see from the US Treasury 10-year and 30-year charts

I maintain that any 35-year bull trend is a bubble waiting to burst.  The profit erosion panic may not commence until the Merrill Lynch Treasury 10-year Future Total Return Index (weekly & historic) breaks downwards, but this is a lagging indicator.

The burning fuse is becoming shorter by the day.  You have heard it from the leading authority currently overseeing the Treasury market – Dr Janet Yellen.  

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