By Mark DeCambre
The decline in U.S. Treasury yields on Wednesday is proving a real head scratcher for fixed-income investors and broader financial markets.
Earlier in the session, the 10-year Treasury note /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -1.10% deepened its slide to the lowest level since February, touching an intraday nadir Wednesday morning at 1.285%, FactSet data show.
The yield decline in the benchmark debt, used to price everything from mortgages to corporate debt, has flummoxed investors because it comes at a time when worries about surging inflation are elevated.
Steadily rising prices are bad for long-dated debt because it can chip away at Treasury’s fixed value. So, instead of being bought, long-dated bonds should be sold and yields should increase commensurately.
Most analysts had forecast 10 year Treasury yields to hit around 2% by this point in the recovery from the COVID-19 pandemic.
However, that hasn’t happened, which is leading some on Wall Street to try to discern what the Treasury bond moves, including a flattening in the yield curve, or difference between yields on short-dated notes and longer-dated bonds, means for the economic outlook.
The pain trade
Bets that yields will head higher have been a losing wager on Wall Street and the unwinding of some positioning has contributed to aspects of the fall in long-dated yields.
Most traders are positioned for 10 year yields at or around 2% in the near term because it is a bet that makes sense given that some Federal Reserve policymakers have articulated plans to eventually scale back on monthly purchases of assets that include some $80 billion in Treasurys.
Periodic surges in yields have forced a number of unwinds of short Treasury bets, which have amplified recent moves, analysts have said.
“And right now with rates, the pain trade is a continued move lower and flatter,” Greg Faranello, head of U.S. rates at AmeriVet Securities, wrote in a Wednesday note.
A dimming outlook foraa fast economic recovery, highlighted by an uneven rebound in the labor market, may also be contributing to traditional haven buying for Treasurys.
U.S. businesses are struggling to fill millions of available jobs. Although the U.S. created 850,000 new jobs in June , it would take more than a year at that rate to restore employment to pre-pandemic trends, a far slower rebound than anticipated by economists months ago.
On Wednesday, the number of available jobs set a record for three straight months, with May producing a record 9.21 million openings .
To be sure, many are expecting that the jobs market will normalize as fiscal stimulus measures to help out-of-work Americans roll off in the months to come, compelling a fuller return to work.
Mizuho economist Steven Ricchiuto, in a Wednesday research note, wrote that there are some signs in layoffs and quits that imply that only a temporary challenge by businesses looking to fill jobs.
“Layoffs have declined to a new all-time low, and the level of hiring and quits have declined and are now closer to their pre-pandemic levels,” the Mizuho economist wrote. He continued: