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June 5, 2020, 9:12 a.m. EDT

Here’s why a disorderly selloff is convulsing the once peaceful U.S. bond market

The U.S. 10-year Treasury note yield is moving fast towards the key 1% level

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By Sunny Oh


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Could bond yields fly to the moon?

After days and weeks of listless trading, the U.S. bond-market is finally breaking out of its stupor.

U.S. long-term government yields rose on Friday on signs of an economic recovery as businesses reopen as the coronavirus pandemic recedes in much of the world, easing demand for haven assets.

“One thing we’ve been seeing lately markets have been far ahead of where the economy is. Maybe the move in rates is somewhat of a catch-up,” Charlie Ripley, senior investment strategist at Allianz Investment Management, told MarketWatch.

The 10-year Treasury yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.76%   has risen above key trading thresholds, pushing above the 0.75% level that has capped the benchmark maturity since March. It last traded at 0.91%, up sharply from 0.65% where it closed at the end of the week.

On sheer momentum alone, Tom di Galoma of Seaport Global Securities says the 10-year note could climb as far as 1%.

A surprisingly positive U.S. employment report added to the bearish pressure. Despite expectation for further layoffs, the U.S. economy gained 2.5 million jobs in May and the unemployment rate fell to 13.3%.

“Today’s employment data lets us breathe a collective sigh of relief,” said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors, in e-mailed comments.

But even among those who see the prospect of economic optimism weighing on bond prices, many say its hard to anticipate the 10-year returning to levels where it stood before the pandemic ravaged the global economy, as the labor-market recovery is expected to take years, not months.

It’s why some see the reflation narrative as only one piece of the puzzle for the bond-market’s selloff this week.

Expectations for investors to start shifting their bond holdings to equities has been cited as a potential driver of higher yields in recent sessions. Some have even talked about the investors trying to position ahead of moves by the Federal Reserve to cap bond yields in short maturities, amid expectations that such a policy would help boost inflation expectations and send long-dated yields higher.

Read : Get ready for the Fed to deploy untested monetary policy plan in September, says analyst

In the end, the selloff could be simply down to the Fed reducing its daily purchases in bond-market, taking away a security blanket for the bond bulls. As the liquidity problems that plagued Treasurys trading in mid-March ease, the Fed has also reined in its asset purchases.

The U.S. central bank now holds $4.13 trillion of government bonds, as of June 3 .

/zigman2/quotes/211347051/realtime
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
0.65
+0.0049 +0.76%
Volume: 0.00
July 8, 2020 4:54a
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Sunny Oh is a MarketWatch fixed-income reporter based in New York.

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