Bonds are getting battered so far today…
Pushing 30Y yields breaking above 2018 highs (back to 2014 levels)…
And 5Y within a tick of 3.00%…
A lot of bond bear hopes had been pinned on rising oil prices but that pair has decoupled in the last week…
However, as LPL Research notes, the recent surge in Treasury yields may be limited.
Longer-term yields have recently shown a feat of strength not seen in more than seven years.
As shown in the LPL Chart of the Day, the 10-year Treasury yield has closed at or above 3% for 10 consecutive trading days, the longest such streak since May 2011.
Still, non-hedging traders have built on a record net short position in 10-year Treasury futures (a trend we’ve covered in a previous blog), projecting lower prices and higher yields.
Fixed income investors have reason to expect higher yields.
The Federal Reserve (Fed), the biggest buyer of fixed income since the financial crisis, is in the process of reducing assets from its $4.2 trillion balance sheet. Policymakers have also projected five rate hikes between now and the end of 2020, implying that rates will continue to move up as monetary policy tightens.
However, we think gains in U.S. government debt yields may be limited by valuations and relatively low wage inflation. Yields around the world remain at depressed levels, so we expect global fixed income investors to continue turning toward U.S. Treasuries for diversification, valuation, and income.
“We think Treasury yields may experience only modest increases through the end of this year and into next year,” said LPL Chief Investment Strategist John Lynch.
“Pricing and wage pressures remain at manageable levels, and U.S. yields remain attractive to global investors.”
Trade tensions and currency turmoil have also weighed on global equity prices. With no U.S.-China trade resolution in sight, we expect renewed Treasury buying if trade talks sour and tariffs increase.
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