Long-Bond Pain Resumes, Steepening U.S. Treasury Yield Curve

(Bloomberg) -- Long-term Treasuries resumed their selloff, though trading was more orderly than during Thursday's troubled session, as stocks rose and investors focused on improved U.S. economic prospects.

Yields on 30-year bonds increased as much as 8.1 basis points to 2.23% on Monday, and 10-year rates also climbed. By contrast, shorter-dated Treasuries found support, steepening one of the most widely watched yield curves: the 5- to 30-year gap. Late in the session it was 7.6 basis points steeper, one of the biggest increases since the pandemic began.

The upheaval last week, which saw some of the sharpest moves in months, has left many traders licking their wounds as investors try to fathom what the impact of higher rates will be on riskier assets and the trajectory of the economic recovery. During the mayhem Thursday, stocks and bonds both fell significantly, giving off a whiff of panic. But on Monday a more normal pattern emerged with the two assets moving in opposite directions, a more typical reaction to an improving economic outlook.

“From a real economy standpoint, the back-up in yields may be early, by a month or two, but looks far from irrational, given the fiscal and vaccine outlooks,” Alan Ruskin, chief international strategist at Deutsche Bank Securities, wrote in a report.

Markets may remain volatile in the near term, especially with this week bringing a slew of economic releases such as the monthly jobs report and speeches by Federal Reserve officials. U.S. manufacturing expanded in February at the fastest pace in three years while a gauge of materials costs accelerated the most since 2008 amid supply shortages, data on Monday showed.

Treasury Curve Dysfunction Ignites Talk of Federal Reserve Twist

So far, U.S. central bankers have dismissed concerns about the run-up in yields, with Fed Chairman Jerome Powell calling it “a statement of confidence” in the economic outlook. But investors are looking for further guidance from him and other officials this week on whether the speed of the increase will elicit any pushback.

On Monday, Richmond Fed President Thomas Barkin played down the Treasury market's recent volatility, saying that he's mostly concerned about the labor market. Barkin, a voter this year on the rate-setting Federal Open Market Committee, added that if the driver of long-end moves was news about vaccines, the health of the economy or fiscal stimulus, it's “a natural reaction.” Powell is set to speak Thursday in what will likely be his final public remarks before a mid-month policy meeting.

Solita Marcelli of UBS Global Wealth Management sees the yield curve continuing to steepen. “The path is unlikely to be linear but the bear steepening trend, which is typically associated with better returns for risk assets, should be with us for a while,” wrote the chief investment officer for the Americas region in a Monday report.

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