The price of 10-year U.S. Treasuries has fallen sharply during the past five days as investors eye a heavy week of government bond auctions - but the rise in yields can also be viewed as a positive omen.
The yield on 10-year U.S. Treasuries temporarily broke through the 4-per-cent level during trading yesterday but closed at about 3.99 per cent. The yield climbed 12 basis points over the past five trading days and is up 31 points over the past month. (A basis point is 1/100th of a percentage point.) It has not closed above 4 per cent in more than 17 months, though on an intraday basis it reached that level in June.
This was the seventh time in 10 months that the 4-per-cent threshold has been challenged, said David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates Inc.
What are the expectations? Some attribute the rise in the yield to recent U.S. government bond auctions, which indicate investors may be becoming fatigued and are losing their appetite for Treasuries. Some are concerned about rising U.S. debt levels, and that's pushing prices down and yields up.
This week should be another good test of that thesis. Today, the U.S. Treasury will auction $40-billion (U.S.) in three-year notes, followed by the sale of $21-billion in 10-year bonds tomorrow and $13-billion in 30-year notes on Thursday. However, there is a bright side.
"The data show that the economic recovery has momentum and the Treasury market is starting to price that in," said Michael Pond, an interest-rate strategist for Barclays PLC, told Bloomberg News.
"It's a potent combination of an economic recovery and fiscal concerns all at once," said Eric Lascelles, chief economics and rates strategist with TD Securities Inc. "The 4-per-cent level has come sooner than expected. But our view is that there will be an upward trudge [in yields]over the next year."
How will the market react? Part of the reason for the rise in yields could be the phasing out of quantitative easing by the U.S. Federal Reserve Board, which has been injecting cash into the system to help hold interest rates down in the short-term, said Mark Chandler, fixed-income strategist with RBC Dominion Securities Inc.
The Fed helped to keep interest rates down by buying fixed-income securities. Its policies also facilitated easy financing of bond purchases. While bond yields are rising, inflation pressures seem to be subdued, despite the liquidity injected into the economy.
"The relation between money supply and lending has been tepid," Mr. Chandler said, and the growth in money supply has not appeared to trigger inflation.
Meanwhile, money supply measures in the U.S. during the past few weeks have been shrinking. "This should actually be very bullish for the fixed-income market," Mr. Rosenberg said.