|
 Fewer investors are talking symbolism now after an unexpectedly
strong February jobs report indicated the economy may be picking up
steam. Dramatic moves in the bond market, along with gains in the
U.S. dollar, show that more investors are positioning for a series
of rate increases in 2015, rather than a token move.
Friday saw short-dated bond yields see their biggest gains in a
month as more buysiders started to come in line with the thinking of
big brokerages who see the Fed raising rates multiple times in the
second half of 2015. And long-term rates rose even further, with the
10-year yield posting its biggest move in more than a year.
Prior to the jobs data, many investors had priced in the timing of
the first rate increase for late this year, with some still thinking
a move might not happen at all in 2015.
"It really drives home how much of a recovery we've seen," said
Kristina Hooper, head of portfolio strategies at Allianz Global
Investors in New York, which manages $499 billion. "It has changed
market sentiment."
The spike in yields has led some investors to become reticent to own
too many Treasuries and to consider holding riskier and
higher-yielding bonds.
Speculators taking short positions against the benchmark 10-year
TYv1 in the futures markets are likely to boost those bets, which
were at a seven-week high prior to the jobs report. Bank of America
Merrill Lynch analysts said on Monday it might be the most
profitable time ever to bet on short-dated U.S. rates to spike
higher.
To be sure, evidence of weakening U.S. growth or another flare-up
between Greece and its European creditors could cause investors to
rethink whether Fed chair Janet Yellen and other top Fed
policy-makers will soon hike rates. Some economists including
Lawrence Summers point to scant evidence of inflation, particularly
in wages, and have urged the Fed to not raise rates "until it sees
the whites of inflation's eyes."
Prospects that the Fed might tighten this summer is driving more
money out of funds focused on long-dated Treasuries. For example,
BlackRock's iBoxx investment-grade corporate bond ETF LQD.P, which
buys securities with higher yields than government debt, saw $1.4
billion in inflows in February, compared with $90 million outflows
from its iShares 20+ year Treasury bond ETF TLT.P.
"The Treasuries market is still quite expensive with yields quite
low. We think there is better opportunity to rotate into corporate
and emerging market bonds," said John Bellows, portfolio manager at
Western Asset Management Co in Pasadena, California, with $466
billion in assets.
[to top of second column] |
The equity market hasn't been immune, either, with the Standard &
Poor's 500 Index down 2.2 percent since Thursday's close.
Futures markets suggest a U.S. rate increase in June is back in
play. The altered outlook on the timing and pace of a Fed "lift-off"
brings them closer to the consensus long-held among some longer-term
investors and Wall Street economists. A Reuters poll conducted
Friday after the jobs report shows many Wall Street firms see the
first hike coming in June.
On Friday, the two-year Treasuries yield US2YT=RR rose to almost
0.75 percent, highest since late December. Its yield against
long-dated yields grew to its widest in more than two months,
suggesting traders see the pace of rate increases to be faster than
they had thought.
The dollar index, meanwhile, has risen 9.1 percent against a basket
of major currencies in 2015, following a 12.8 percent gain in 2014,
the biggest gains since 1997.
The bond market has played this game in previous years, with a sharp
rise in yields early in the year, only to decline in the summer as
growth disappoints. If that happens again, and the Fed opts to
postpone a rate hike, it might spark a rally in bonds and stocks,
and cool the dollar.
Foreigners' interest in Treasuries as the European Central Bank
begins a one-trillion-euro bond purchase program may help keep
longer-dated yields a bit lower.
"I think long-term rates could stay low on a lot of forces, but we
are in an environment where short-term rates would be moving higher
as we move closer to lift-off," said Bill Irving, a Merrimack, New
Hampshire, portfolio manager at Fidelity Investments that manages
$870 billion in bonds.
(Reporting by Richard Leong. Editing by David Gaffen and John
Pickering)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
