US Treasuries slide as global stocks recovery clips haven rally

[WASHINGTON] Long-end US Treasuries fell as a rebound in global stocks reduced the appeal of haven assets, while comments from Federal Reserve chair Kevin Warsh did little to alter the outlook for interest rates.

The 10-year US yield climbed four basis points to 5.10 per cent, while 30-year rates were up by the same amount to 5.44 per cent, underperforming European bonds. Short-end Treasuries were little changed.

Warsh did nothing to dispel market expectations that the US central bank will hold interest rates steady when it meets at the end of October.

In a moderated discussion on Friday morning in Bangkok at the International Monetary Fund’s annual meetings, he made no remarks on monetary policy or his outlook for the US economy.

The lack of fresh guidance left Treasuries at the mercy of global risk appetite, which modestly improved on Friday. It is a reversal of the previous day’s sentiment, when a steep sell-off in artificial intelligence-related shares prompted investors to pick up safe-haven US debt.

“This is the classic paring back the rally we had yesterday,” said Leejun Foo, fixed income strategist at Mizuho International.

“The selling we’re seeing is in the long-end, driven by factors such as higher growth, inflation and fiscal concerns, all of which haven’t gone away.”

Expectations for US interest rates in the longer term were little changed after Warsh’s remarks, with swaps fully pricing three more quarter-point hikes over the next 12 months.

The fact he refrained from a more hawkish tone reinforced traders’ conviction on a hold this month, and the chance of a hike fell from 30 to 20 per cent.

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The prospect of more Fed tightening has kept US yields elevated, especially after data this week showed that inflation pressures both at the consumer and wholesale level remain high.

At the same time, Thursday’s tech stock sell-off has raised questions about the sustainability of the current AI investment boom.

That prompted some investors to trim bets against longer-dated Treasuries, the yields of which have hit their highest in more than two decades.

Bloomberg Markets Live Asia team leader Garfield Reynolds said: “Treasuries remain vulnerable to renewed declines as elevated energy costs spur inflation, a dynamic that also may restrain any rebounds in stocks.

“The key danger is the mismatch between traders paring bets on Fed hikes and central bankers sounding more hawkish.”

The short-lived nature of the Treasury rally suggests that the safe-haven status of US bonds is continuing to wane, said Steven Barrow, head of Group of 10 strategy at Standard Bank.

The need for more policy tightening by the Fed would keep upward pressure on yields, while increasingly diversified global investors were shifting into a wider range of equities, rather than bonds, he added.

“Treasuries are not about to become some sort of safe-asset, get-out-of-jail-free card for burnt stockholders,” he wrote in a note. BLOOMBERG