Does the U.S. bond market have a bad case of “datapathy”?
That’s the question on the lips of bond traders who have seen Treasury yields slide despite a parade of impressive economic data since last week, highlighting the reflationary forces which in the first quarter struck fear into the hearts of the bond bulls.
Yet nearly a million jobs added to the labor market in March and a multi-decade high in a U.S. manufacturing activity index wasn’t enough to reignite the bond-market selloff this month. And those questions came to the fore again after U.S. retail sales rose nearly 10% in March, the second largest increase on record, aided by government fiscal stimulus payments to Americans,
Instead of rising in response to evidence of the improving economic trajectory, the 10-year Treasury note yield
fell around 8 basis points to 1.55% on Thursday, pushing below the 1.60% level that had marked the floor for the benchmark maturity since mid-March.
The drop in 10-year Treasury yields is “very surprising,” according to Jeff Schulze, an investment strategist with ClearBridge Investments. “It’s not the reaction that I would have expected given the huge beat in retail sales” and the drop in jobless claims seen today, he said in an interview.
U.S. claims for unemployment benefits sank by 193,000 in early April to a fresh pandemic low.
Schulze chalks it up to a “‘sell the rumor, buy the news” reaction where investors had been anticipating a strong retail sales number and had already sold or shorted bonds and were now buying them back again because they believe they’ve seen “peak economic momentum.”
Analysts were also ready to discount the March retail sales data in part because the Federal Reserve’s policy trajectory was likely to be driven by how fast the economy was expected to hit full employment, and not the consumer-driven retail sales numbers that were artificially boosted by the trillions of government stimulus funds coursing through businesses and households.
“Discounting the data makes a ton of sense,” said Tom Graff, head of fixed income at Brown Advisory. “That’s why rates are rallying. It’s just non-information.”
Others suggested the drivers of the bond-market rally had little to do with investors’ expectations over economic growth, but rather behind-the-scenes moves among the likes of fast-moving hedge funds and more deliberate Japanese pension funds.
Analysts had noted Japanese investors were attracted to the current level of yields on U.S. government bonds, even after taking into account the cost of hedging for currency fluctuations.
Indeed, Japanese buyers snapped up $15.6 billion in overseas notes and bonds during the week of April 9, up from the previous week’s $3.4 billion.
“There are some large pockets of money in Asia that are moving in a big way,” said Graff.
Meanwhile, Nomura strategists noted shorter-term traders in bonds such as commodity trading advisors and hedge funds were moving out of their short positions on Treasurys.
When investors cover their short positions and buy bonds, they can end up fueling the rally in government bonds beyond what economic fundamentals might dictate.