"Treasury sell-off goes short
New developments on Monday in THE story in financial markets.
We refer, of course, to the adjustments in the US Treasury curve, the sell-off in which until now was mainly confined to longer-term maturities.
On Monday, however, it was the turn of the front-end of the curve to suffer a significant spike in yields as investors priced in growing chances of a Federal Reserve interest-rate increase by the year’s end as they became more inflationary in mindset.
As Dow Jones reported (our emphasis):
NEW YORK (Dow Jones)–Investors continued to shed shorter-maturity Treasurys Monday on a growing view that policymakers could tighten interest rates sooner than expected given less dire data. The two- and three-year notes bore the brunt of the selloff Monday, building on a sharp price drop Friday. That move was sparked by a much less dire than expected May employment report, which boosted beliefs the Fed could raise its key rate sooner to stem inflation given economic data of late that has surprised to the upside. The two-year yield is now about 40 basis points higher than it was just a week ago. Bond prices move inversely to yields.
Over at the Zero Hedge blog, Tyler Durden, provides the following analysis:
The chart below demonstrates the 1 year forward level on the 1 Year treasury. Someone really just went all in on Bernanke’s bluff. 2Y/1Y flatteners anyone? Wait, what’s that? Every prop desk had a steepener on and was highly levered into it? Basis trade blow up deja vu anyone? Wait for opportunistic hedge funds to be ramping into the flattener and killing who knows how many props on the wrong side of the trade.
We guess that means there could be quite a clean-up operation come Tuesday.
“The adjustment in the US Treasuries market is THE story in financial markets” - FT Alphaville
Bond market closing levels - FT Alphaville
US Treasuries selling off, benchmark yield curve hits record wide - FT Alphaville
Jun 8 22:56
Does this mean that investors thought that the Fed was going to raise interest rates significantly on short term bonds in the near future? I read him saying this:
"Right now, because of the weakness in economic conditions here and around the world, inflation has been running less than that, and our best forecast is that inflation will remain quite low for some time."