Worst weekly loss in a year shows treasuries stuck in tug-of-war

Bloomberg

A week after the benchmark 10-year note yield hit an all-time low, it bounced back at the most rapid pace in more than a year. Helping to upend the record rally: increasing evidence that the U.S. economy is getting back on track. From a boost in retail sales to higher consumer prices, data this week lifted yields while reviving bets that the Fed Reserve will raise interest rates this year.
Treasuries have surged in 2016 as investors sought alternatives to sub-zero bond yields in Europe and Japan after central banks there adopted negative rates in an effort to spur economic growth. Concern that Britain’s vote to exit the EU would slow global expansion extended the rally and pushed sovereign-debt yields to record lows. These forces have made it harder for the Fed to tighten policy despite encouraging U.S. data, with both traders and policy makers paring forecasts for how quickly rates will rise.
As U.S. economic reports improve,“economists out there think a December rate hike is possible — that’s not priced into the market,” said Brian Brennan, a money manager in Baltimore at T. Rowe Price Group, which oversees $175 billion in fixed-income assets. With dueling global and domestic forces, a “tug-of-war could create a range-bound environment, but it’s not without volatility.”

Yields Climb
Such volatility means Treasuries may still reverse course quickly, particularly if new global concerns emerge. Reports of a coup effort in Turkey late Friday caused 10-year notes to pare the day’s losses.
The benchmark 10-year note yield rose 19 basis points this week, or 0.19 percentage point, to 1.55 percent as of 5 p.m. Friday in New York, its largest weekly jump since June 2015. It set a record-low closing level of 1.36 percent on July 8. The price of the 1.625 percent security due in May 2026 was at 100 21/32 of face value. Yields climbed to the highest since June 24, the day after the Brexit referendum, as U.S. economic data are now beating analysts’ predictions by the most in 18 months. Citigroup Inc.’s U.S. Economic Surprise Index, which measures whether data beat or miss forecasts, rose to the highest since January 2015.