Treasuries' pain seen deepening amid grimmest year since 2013

New York

THE US Federal Reserve is doing its best to avoid the taper tantrum of 2013 as it moves towards curbing its bond buying. Ironically for Treasuries investors, 2021 could turn out to be even worse than eight years ago.

The latest bond sell-off - triggered by a hawkish shift in the Fed's signal on its policy path - has left the Bloomberg US Treasury Index down 2.2 per cent this year, on track for the first annual loss since 2013, when it declined 2.8 per cent. With key measures of inflation surging and coronavirus cases starting to ebb, investors and strategists from firms such as Societe Generale and UBS Group are bracing for more losses this quarter. Confidence in that view may only grow with the release of monthly jobs data this week, which is forecast to show hiring accelerated in September.

"It may not be a straight line higher, but there's some catch-up to do" for bond yields, said Leslie Falconio, head of US fixed-income asset allocation at UBS Financial Services. "Our expectation is that consumer demand will recover from the setback" of the past few months, when the resurgent virus slowed economic momentum.

Ms Falconio expects 10-year Treasury yields to rise to around 1.75 per cent by the end of the year, around their peak for 2021. The yield reached about 1.57 per cent in the past week - the highest since June - before buyers started to nibble.

After several months of stability, global bond markets started to slump last month after central banks including in the US and the UK signalled a move to reduce pandemic-era stimulus to head off inflation. Traders boosted bets that the Fed will start raising rates late next year and lift them almost three times by the end of 2023. A power crunch across Europe and China is also keeping bond investors on edge.

There are plenty of forces that could limit a further sell-off. Lawmakers are locked in a standoff over raising the US debt ceiling, with the government weeks away from a possible default, in the estimate of the Treasury. And in China, growth is cooling amid a property market slowdown and a power shortage. But so far, international investors don't seem to be swooping in with significant purchases, a dynamic that has capped Treasuries declines in the past.

The market is hardly anticipating a repeat of the rout eight years ago, when then-Fed chairman Ben Bernanke triggered a surge in yields after he suggested the central bank could begin to reduce asset purchases. In that episode, 10-year yields jumped more than 100 basis points in four months.

But traders are now turning to the September labour report for the next potential catalyst for higher yields. With the Fed all but teeing up November as the likely announcement of a plan to reduce its asset purchases, the payroll report on Friday could ratify that view by offering fresh signs of broad economic strength. The median forecast of analysts surveyed by Bloomberg is for a gain of 470,000 jobs in September, double the previous month.

Investors have been tilting towards an extended sell-off. A JPMorgan Chase survey showed that a net 25 per cent of its clients were short Treasuries as of Monday, the most since early September. "If we get a number close to the consensus, we see the potential for yields to rise in the back end," said Subadra Rajappa, head of US rates strategy at Societe Generale, who predicts 10-year yields will rise to 1.7 per cent by the end of the year. BLOOMBERG