Traders Bet New Waves of Bond Selling Will Push Yields Over 3.15%: MLIV Pulse Survey

(Bloomberg) -- Brace for fresh blows to the $23 trillion Treasury market -- saddling holders of supposedly safe bonds with unprecedented losses while threatening more pain for global risk assets.

In the last MLIV Pulse survey, a clear majority of the 807 market participants project the 10-year yield will climb above 3.15% -- peaking only in the third quarter -- while 41% reckon it will eventually hit 3.4% from about 2.9% currently. The results reflect the growing risk that the Federal Reserve will end up hiking interest rates near the hawkish end of expectations as it battles to tame inflation around four-decade highs.

Traders are betting the U.S. central bank will increase the overnight lending rate by a half-point this week and at least that much in June. Some 25% of MLIV readers expect it will be forced into a super-sized 75 basis-point hike down the road, with some in the market increasingly coming round to that view. That's even as key officials show scant support for shock-and-awe tightening on this scale. 

All told, the lion's share of MLIV Pulse respondents, including portfolio managers and strategists around the world, are gearing up for an ever-hawkish policy trajectory ahead of the Fed gathering this week. And that signals more woe for the world's largest bond market after its worst start to a year in at least two decades.

According to more than three-quarters of survey respondents, 10-year yields will rise an additional 25 basis points from Friday's close before they peak. This week has begun with the yield on 10-year Treasuries touching 3% and closing on Monday just below the level.

“We'll get to 3.25% in this cycle, it seems very likely to me with a possible overshoot,” Kit Juckes, a currency strategist at Societe Generale SA, said on Bloomberg TV. “We got more inflation coming, the U.S. economy is still performing strongly.”

The Bloomberg U.S. Treasury Index has lost about 8% this year, notching its worst quarter on record. The deepest loss in a single year was just 3.6%, in 2009. A quarter-point rise in 10-year yields from current levels, as projected by MLIV readers, implies a further negative return of 1.4%. A combined slump of that magnitude would be a once-in-a-decade event for stocks -- let alone for the world's primary haven asset.

If survey respondents are right, risk assets from growth stocks to emerging-market currencies face more pain. One winner, however, may be value investing. In last week's survey, a majority of respondents said equities that trade with cheap valuations are set to outperform growth companies. If yields keep rising while the U.S. business cycle stays relatively healthy, that camp will be vindicated. Higher 10-year yields would likely boost commodities and energy stocks, according to Bloomberg calculations, while knocking tech lower still.

Rising rates have crucial implications for corporate bonds, too. Investment-grade companies are teeming with interest-rate risk, or duration, making them acutely sensitive to rising yields. 

Another way of thinking about the survey results: The bond market has yet to fully price in Fed hikes, with 75% expecting yields won't peak this quarter while 17% project a 3.7% handle on the 10-year note down the road. All that suggests market participants may demand compensation for holding longer-term bonds amid extended inflation risk, a measure known as the term premium. 

The survey respondents consisted of 30% retail investors and 63% institutional, with portfolio managers the largest in the latter category. Slightly more than half of the votes came from the U.S. and Canada. The highest proportion of monetary hawks were risk managers. 

More than half of the survey respondents expect five-year yields adjusted for inflation to turn positive by the end of June, implying a roughly 40-basis-point jump from Friday. To push the rate that high, that fast would require either a rapid move up in the nominal rate thanks to strong growth or lower inflation expectations. The five-year TIPS yield jumped 19 basis points today as the 10-year TIPS yield turned positive.

No wonder AC/DC's “Highway to Hell” and Bon Jovi's “Livin' on a Prayer” were among the most-popular songs chosen by survey participants as the soundtrack for the great monetary tightening campaign of 2022. 

• For more markets analysis, see the MLIV blog. For previous surveys, and to subscribe, see NI MLIVPULSE.

©2022 Bloomberg L.P.