None of this is welcome news for those who bought into U.S. auctions last week. Investors snapped up a combined $68 billion of 10- and 30-year debt at yields more than 10 basis points lower than current levels. This week brings a $27 billion 20-year bond auction on Wednesday.
In the U.K., 30-year yields hit the highest level since March after the country hit a milestone in its vaccination program, supporting calls for easing of social restrictions. Germany’s benchmark yield climbed to levels last seen in June amid a significant slowdown in virus cases.
The selloff was broad, with even Italian bonds -- which would typically outperform haven assets such as German bunds when credit spreads tighten and stocks climb -- under pressure. The announcement of a new 10-year benchmark bond sale to take place via syndication saw yields also advance five basis points on Monday. Still, demand on Tuesday set a record of more than 110 billion euros ($133 billion).
Buying the dip has always worked in the bond market. The question for many fixed income investors is what will the catalyst be to stem the slide. The stock market has already priced in reflation. The stock market exceeded its 2019 highs months ago and the recovery in the social and industrial segment of the market continues.
The challenge for bonds is supply has increased substantially over the last 12 months and if yields climb back to their pre-crisis levels, the cost of servicing the debt will represent a significant challenge for government. Most governments, including the USA and UK saw the cost of servicing their debts fall in 2020. That’s despite the increase in supply. The happy condition is completely dependent on yields staying low.
As yields breakout all over the world, the question of debt servicing costs and the commitment of central banks to Modern Monetary Theory will move front and centre.
10-year Treasury yields have completed an almost yearlong base and clear and a clear downward dynamic would be required to question medium-term scope for additional upside.
10-year Gilts also have completing base formation characteristics, with the dynamic move through 50 basis points.
Yield curve control will be required to arrest the sell-off.Back to top