Treasury Yields Tarnished Again

by Dan Burrows | April 13, 2012 11:58 am

The selloff in the bond market sure didn’t last long. On Friday, we learned that China’s economy grew at a slower-than-expected rate in the most recent quarter, Spain’s debt costs soared and inflation remains muted. And presto! The yield on the benchmark 10-year Treasury note fell back to 2%.

Sometimes the risk-on/risk-off trade seems to flash as quickly as a strobe light. A month ago, the yield on the 10-year Treasury spiked on reams of better-than-expected economic news and fear that the Federal Reserve would turn off the liquidity spigot.

An apparently accelerating recovery and lower prospects for a third round of quantitative easing spooked the bond bulls, who sold holdings. Since yields and prices move in opposite directions, the 10-year Treasury note went from paying less than 2% to 2.4% — a big move in bond terms.

What a difference a month makes. A disappointing March jobs report set the stage for the big reversal in bond yields, and it has only picked up steam since. China fears and the resurgence of the European debt crisis — this time centered on Spain — have investors scrambling once again for safe-haven assets.

That has pushed Treasury yields back down to early March levels. Any near-term anxiety that higher borrowing costs will hurt the tepid economic recovery seem unfounded at this point. After all, interest rates in the real world are notching new historical lows. The average rate on the 30-year fixed mortgage dropped to 3.88% earlier this week, Freddie Mac said, just a smidgen above the record low of 3.87% set in February. The 15-year mortgage, meanwhile, hit an all-time low of 3.11%.

As we noted in March[1], fear that the bond bubble was deflating and rising interest rates, especially for mortgages, would choke off the recovery seemed very much overblown at the time. Partly that was just based on the natural ebb and flow of any market: Just as stocks never move in a straight line, neither do Treasurys.

David Rosenberg, chief economist and strategist at Gluskin Sheff, got that call right. Treasurys have been logging remarkably similar patterns of selloffs for several years now, only to recover when something spooks the market and the risk-off trade returns.

“Has anyone recognized how the yield on the 10-year T-note surged in the winter-spring of 2008, 2009, 2010 and 2011?” Rosenberg said in a Friday report to clients. “In each of the past three years, 4% was either pierced, tested or approached. This time the seasonal high was 2.4%. Are you kidding me?”

So not only does the bond market go through a selloff about this time every year, but so far this time around the selling has been pathetically weak.

And more than just the short-term trade bodes well for higher Treasury prices. Both the International Monetary Fund and PIMCO CEO Mohamed El-Erian expressed concern this week that demand for safe assets — notably sovereign debt like Treasury bonds — is outstripping supply. That will keep prices high and yields low regardless of what the Fed does. Until the global economy is indisputably on firmer footing, the European debt crisis is definitively dealt with and inflation comes back, Treasurys will have bidders — and that looks to be for a good long while yet.

  1. As we noted in March:

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