Treasury turmoil could get worse

The Treasury market may be just one spark away from exploding and sending 10-year yields all the way to 2%, suggesting that the rout of 2021 may not yet be over and raising the chances that other assets like emerging-market bonds might also be living on borrowed time.

Analysts are now putting the target on US Treasury yields around half a percentage point higher than current levels following a recent rapid, reflation-fuelled selloff.

Should that happen, it’s not just developed markets that will be left reeling. Developing-market bonds are increasingly at risk as investor concern grows about stretched valuations and the chances of a policy misstep by the Federal Reserve.

“The velocity of the moves in US Treasury yields are now intensifying at a time when both hard currency and local emerging-market bonds are more vulnerable to such a move,” said Lisa Chua, a portfolio manager on the emerging-markets debt team at Man GLG, the hedge-fund unit of Man Group Plc.

Analysts at ING say investors’ attitude toward holding longerdated Treasuries has grown cautious, exacerbating the potential for rapid selling on any sign of weakness. They see yields on 10-year Treasuries rising another 50 basis points, joining the likes of BNP Paribas which also expects yields at 2% by yearend. That’s sounding the alarm that there is little to stop yields surging higher.

Investor jitters were on display again last Wednesday, when a bigger-than-expected bond sale plan from the UK caused ructions globally. The US 10-year yield jumped to around 1.49%, closing in again the one-year high above 1.60% that they reached on Feb 25 in the wake of a choppy 7-year Treasury sale.

Concern over supply hitting the market is adding to fears inflation is set to accelerate, which could force central banks to begin tightening policy. Then there’s the risk liquidity evaporates to fuel sharper moves.

“The bond market has been sitting on a powder keg since last week,” wrote ING strategists. “In this context, we do not blame investors for exiting at the first sign of a selloff.”

Federal Reserve chairman Jerome Powell has indicated that the Fed sees rising yields as a sign of economic health, but that message could well be shifted. The European Central Bank, meanwhile, has indicated it sees no need for drastic action to curb the rise in longer-term borrowing rates.