Date: October 4, 2018
United States:
Bond Bears Popping Champagne Say U.S. Yields Have Room to Rise
A week after Treasuries mysteriously rallied in the wake of the Federal Reserve lifting its long-term interest-rate forecast, short sellers in the $16 trillion market have reason to celebrate. The bond selloff deepened Thursday after data Wednesday on U.S. private-sector jobs bolstered the case for the Fed to keep raising rates into 2019, sending 10-year notes down the most in more than a year. Thirty-year Treasury yields pushed above the 3.25 percent level that fixed-income veteran Jeffrey Gundlach identified as a “game changer.” “Solid data releases, higher oil prices and a technical backdrop that suggests there are not a lot of obstacles for yields to continue to push higher will have many wondering how far this new push higher can go,” said Rodrigo Catril, a Sydney-based strategist at National Australia Bank Ltd. With an American economy in good shape and equity prices flirting with record highs, 10-year yields appear to be breaking out of the range of about 2.8 percent to 3.1 percent that’s lasted for months. Next up on the potential-catalyst list is Friday’s payrolls report, which gets even more focus given the emphasis Fed officials are placing on data. Short sellers were already positioned for more pain in the Treasury market. Speculative net short positions on 10-year notes climbed to a record, the most recent Commodity Futures Trading Commission data showed. An update to those figures comes Friday. “In hindsight we wish we were even shorter on U.S. rates,” said Raymond Lee, a fund manager at Kapstream Capital Pty in Sydney. “My view was that U.S. yields were going to go up — maybe to 3.25 percent — but I didn’t think it would be this quick.” Ten-year yields reached as high as 3.23 percent on Thursday, handily above the peak in May, and the highest since 2011. It’s also above where most analysts had expected them to end the year, with the median estimate at 3.10 percent in a Bloomberg survey.
Europe:
European Bonds Slide as U.S. Economy Blunts Italy Deficit Fears
European bonds slid after Treasuries dropped as investors priced in a faster pace of U.S. interest-rate hikes. German bunds led declines in the euro area, with 10-year yields rising to a one-week high, while those on U.K. gilts approached the highest level in more than two-and-a-half years. Treasury yields climbed to the highest since 2011 after U.S. economic data Wednesday bolstered the case for the Federal Reserve to keep raising rates into 2019. The sell-off, following better-than-expected U.S. manufacturing, services and jobs data, ended a flight to safety seen in European debt this week on fears of a blow-out in Italian finances. Fed Chair Jerome Powell lauded the U.S. economy’s performance and said interest rates may go past a long-term neutral level. There was also some relief on Italy as Prime Minister Giuseppe Conte said the country would trim its budget deficit plans. “It looks like the perfect storm for bunds,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. “The sell-off in Treasuries is leading the way after Powell added to the pressure, while sentiment is stabilizing in Italy.” German 10-year bund yields climbed six basis points to 0.53 percent as of 12:20 p.m. in London, after touching 0.55 percent, the highest since Sept. 25. Those on U.K. gilts rose eight basis points to 1.66 percent, shy of 1.69 percent reached in February. Italian bonds opened stronger before erasing gains, with 10-year yields four basis points higher at 3.35 percent. Investors are still waiting for Rome’s populist government to flesh out its fiscal plans. Italy’s Deputy Finance Minister Massimo Garavaglia said the target for next year’s economic growth was 1.6 percent, a figure described as “just propaganda” by Antonio Tajani, the president of the European Parliament.
Asia:
Lebanon Debt on `Unsustainable Path’ as World Bank Cuts Forecast
The World Bank halved Lebanon’s 2018 growth forecast to 1 percent, predicting its ratio of debt to gross domestic product would remain on an “unsustainable path.” The international lender cited a central bank decision to abruptly halt subsidized housing loans as a main factor behind the slowdown in economic activity this year. The real estate sector has provided “a rare source of growth impetus since 2012,” while production in most of the country’s other industries has fallen off, the World Bank said in its October report. The fiscal deficit is projected to grow to 8.3 percent of GDP in 2018 because of the public sector wage raise the government approved last year, the bank said. Subdued growth and high interest payments mean the debt-to-GDP ratio is expected to “persist in an unsustainable path toward 155 percent by end-2018.” Lebanon, the world’s third most-indebted country, has been grappling with political deadlock and fallout from the civil war in neighboring Syria, which has led to an influx of some 1.5 million refugees and the closure of vital trade routes. Prime Minister-designate Saad Hariri’s failure to form a new government has held up $11 billion in loans and grants pledged by the international community earlier this year. In return for the aid, the new government is to implement fiscal and structural reforms including a commitment to an annual 1 percentage point decline in the fiscal deficit ratio over the next five years. Spreads on Lebanon’s credit default swaps and Emerging Market Bond Index Global are even higher than they were after Hariri abruptly resigned as prime minister in November 2017, the report said. It attributed that to a foreign retreat from Lebanese assets due to the lack of a government, geopolitical risks and emerging-market pressures.