Treasurys Rebound From Early Rout

Dow Jones Newswires

U.S. Treasury bonds rallied Tuesday and eliminated an earlier selloff as buyers stepped in after the yield on the benchmark 10-year note hit a six-month high.

The price rebound brought a reprieve to the market, which has been under selling pressure since late April.

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The yield on the benchmark 10-year note fell to 2.256% after hitting 2.366% earlier, the highest intraday level since Nov. 14.

Bond prices rise as their yields fall. The yield was 2.267% Monday.

"Patient capital is already starting to put money to work in bonds" as the selloff has made bonds cheaper to buy, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

A $24 billion sale of three-year Treasury notes on Tuesday attracted the strongest demand from foreign investors since 2009.

The bond-market rout represented a setback after a sharp price rally, which began in early 2014. Concerns have been growing over whether valuations are getting stretched, driving investors to exit bets that bond prices would rise further, known as longs.

German government bonds, the benchmark for eurozone's debt markets, have been the center of the selloff. Investors started unwinding longs after the 10-year bund yield closed at a record low of 0.073% on April 20, driven by the European Central Bank's bond-buying program. Since then, the yield has surged. That shift of sentiment has spread to other bond markets on both sides of the Atlantic.

"It has been a particularly violent and vicious rout," said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at the United Nations Federal Credit Union in New York. "It upended a lot of complacent investors who'd been lulled into following the crowd."

The 10-year yield has climbed from 1.897% reached on April 20.

Rising bond yields impose capital loss on bond holders who had piled into bond markets accepting near record low yields, and push up borrowing costs for consumers and businesses. That would complicate the Fed's plan to raise short-term interest rates for the first time since 2006, and upset the European Central Bank's goal to keep bond yields low via its bond purchases to bolster stagnant growth.

New debt supply has contributed to the selloff. The Treasury is scheduled to auction off $24 billion in 10-year notes on Wednesday, and $16 billion in 30-year bonds on Thursday.

Additional supply pressure is coming from the corporate sector. Companies are taking advantage of still-low interest rates to refinance. They typically sell Treasury debt to hedge unwanted interest rate volatility when selling new bonds, highlighting the Treasury bond market's important role in corporate financing.

Many investors have warned that bond investors are vulnerable to sharp capital losses if they rush to sell bonds at the same time. Yields near record lows mean even a moderate selloff in bond prices could eliminate the meager interest payments.

Traders and investors said low liquidity has magnified the selloff. Banks have been pulling back from their roles as middlemen for bond buyers and sellers following tighter regulations to curb the risk of the banking system.

The rapid pace of the selloff has surprised many investors because there has been little fundamental news over the past few weeks to support the move.

Over the past few days, some big money managers have stepped in to buy as they believe the selloff won't have staying power. Traders say many investors are staying on the sidelines and waiting for bond markets to stabilize before they buy.

Some investors say the risk of bond yields rising significantly is low because Federal Reserve officials have said that the path of a rise in interest rates this time will be gradual and slow, giving investors time to adjust.

(By Min Zeng)