WILL THE TREASURY SELLOFF CONTINUE?

Friday there were several headlines stating “There is a buyer strike on Treasuries” or “How high will yields go on Treasuries” or “Are we about to enter into the Treasury Abyss.”

As I have commented several times, the surprising aspect for the bond market during 2021 is the unrelenting advance from April through August that drove yields lower by 60-70 basis points, a rally that was in the face of the greatest inflation in about a generation and acceptance the Fed will begin tapering in the intermediate future.

In my view the recent selloff is nothing other than returning to reality. Similar to BlackRock, Goldman, Citi, etc. I believe the 10-year has a distinct probability of yielding 2.0% by year end.

The 10-year is currently yielding about 1.47% up from a 1.11% yield about a month ago but lower than the 1.70% yield at the end of March.

The Treasury market entered its first bear market—defined as a drop of 20% or more—during 1Q21, the first bear market since 1980.  Treasuries bottomed around March 24 with a loss of about 23%.

Medium term investment grade bonds declined a similar amount which in turn caused an average decline of 14% for a 60% equity account and 40% bond account as per Bloomberg.

As noted the bond market reversed this decline until early September. The current two-day selloff is intense but pales in comparisons to ones experienced in 1994, 2000 and 2013.

Will the selloff continue?

Perhaps the only definitive statement to make if the selloff does continue volatility will rise for equities, especially those issues trading at very high valuations. As noted many times the largest component of valuation formulas are interest rates for such is the discounting factor for present and future value of cashflows.

Will the hyperbole surrounding the selloff in Treasuries be replaced by an apocalyptic narrative about the debt ceiling? I do agree that if the US defaults the economic system as we know it may cease to exist. As much as I am against the ever-growing welfare state, it is just plain stupid and idiotic to talk about defaulting. It is reckless.

I do believe the debt ceiling will be raised but I am relatively certain the vitriol could become intense.

The economic calendar is crowded with a number of tier I releases including inventory data, sentiment surveys, the ISM and various inflation statistics. How will such influence outlooks? Additionally, Treasury Secretary Yellen and FRB Chair Powell will give Congressional testimony Tuesday about the CARES Act.& Such is not expected to be of great significance but anything is possible in today’s environment.

Last night the foreign markets were mixed. London was down 0.04%, Paris up 0.33% and Frankfurt up 0.38%. China was down 0.84%, Japan down 0.03% and Hang Seng up 0.07%.

The Dow should open nominally higher but the NASDAQ down about 1% on rising bond yields. Crude is also up another 2% on a global oil crunch. Goldman says oil should reach $90 by year end. The 10-year is off 15/32 to yield 1.51%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.