Bill Gross has declared a bond bear market as the 10-year U.S. Treasury yield climbed to its highest level in more than 9 months.
The benchmark U.S. yield rose as much as 6 basis points to 2.54%, a level not seen since last March. The Treasury curve also sharpened the most in three weeks as an excess of bond supply from the U.S., the U.K., Japan, and Germany that coincided with the Bank of Japan’s surprise cut in purchases of long-dated Japanese government bonds.
Despite central bank watchers saying the BOJ’s actions shouldn’t be interpreted as an imminent shift from the super-accommodative policy by Japan’s monetary authority, it’s still another sign of central banks stepping back from global bond markets. The move comes just as the U.S. is about to begin to seek the most debt in 8 years. Combine this to rising expectations around inflation, traders are beginning to wager that Treasuries will soon break out of their tightest range in the last 50 years.
Gross, the billionaire fund manager at Janus Henderson Group, said Tuesday on Twitter, “bond bear market confirmed” as 25-year trend lines were broken in 5- and 10-year Treasury maturities. Gross said last year that 10-year yields consistently above 2.4% would signal a bear market. He added in an interview last week that even in such an environment, investors still probably wouldn’t lose much money.
In 2018, U.S. issuance is expected to rise with a growing budget deficit and the newly passed tax legislation. However, support for lower yields could wane as the Federal Reserve shaves down its balance sheet while other developed world central banks plan their exit strategies.
The BOJ’s recent decision to cut its purchases of longer-dated debt did ignite some nervousness among traders which assisted in moving the U.S. yields higher. While the move does signal the BOJ’s longer-term shift toward monetary normalization, Junko Nishiok, chief economist at Sumitomo Mitsui Banking Corp in Tokyo, noted that the move doesn’t have any new policy implications.
With the spillover impact on Treasuries from the Japanese and German bond markets, Martin van Vilet—a senior interest rate strategist at ING Bank NV—noted that there’s “a lot of supply” coming in government bonds in the euro-area and the sovereign related market. Vilet went on to say that “If the 2.50 percent is breached more aggressively, the path to 2.60 percent will be wide open,” for the 10-year Treasury.
Antoine Bouvet, a strategist at Mizuho International Plc, said that the move higher in Treasury yields is part of a broader fundamental trend that is likely to continue in 2018.
“The economic backdrop is more than enough to keep the Fed on its tightening course and loose financial conditions is making this easier for them,” Bouvet said. “In addition, the support of the Fed’s balance sheet to the UST market is slowly eroding.”
Bouvet predicts the 10-year Treasury yield will hit 2.7% by the end of the year.