Notes from the Desk: US Treasuries – The Trifecta of Pain
The last few days have not been kind to holders of US treasuries, with yields rising and the curve steepening.
One.
The first surprise was the Bank of Japan (BoJ) making an unexpected change to Yield Curve Control (YCC), raising the top end of the range of where they would allow 10yr JGBs to trade from 0.5% to 1%.
Since Japanese investors own roughly $1 trillion of US bonds, the BoJ move is expected to decrease Japanese demand for US treasuries slightly.
Two.
Yesterday, Fitch downgraded US government debt from AAA to AA+. While this move has made headlines, the downgrade is unlikely to result in forced selling as very few investors are restricted to holding US treasuries with only an AAA rating.
Three.
Today the Treasury Refunding schedule was published, exceeding forecasts of supply, with most of the increase in auction sizes coming in longer maturities.
The result is that the US yield curve is ‘dis-inverting’ with rates rising more in the long end than the front of the curve.
Implications.
Despite a series of body blows, the US bond market has held up relatively well, with yields rising a modest 10-15 bps. As against this trifecta of pain, the market is being supported by recent US data, which continues to show a slowing economy. We believe current yields represent an attractive level to extend duration.
