We’ve woken up to a something new in the U.S. Treasurys market. It now looks more like the market in foreign exchange.
By that I mean a cat-and-mouse game between traders and a government entity constitutes at least one dynamic in determining trading action and prices.
For years, periodic government intervention to support a currency, sometimes concerted among a group of countries to achieve a common aim, has been a consideration for traders in the U.S. dollar, the Euro, the yen and other major currencies.
Actual government intervention in forex markets doesn’t happen very often, but the threat is always there, especially during periods of extreme movements. So official remarks about pleasure or displeasure with forex levels at any given time have real market significance.
Trading patterns in forex have sometimes been described as resulting from traders “testing” the resolve of various finance ministries and central banks. So whether they intervene or not, governments are a factor in traders’ strategies.
Now that the U.S. Federal Reserve has ventured out of its comfortable niche of influencing short-term interest rates into direct involvement in the longer end of the Treasurys market, those forex market-like reactions by traders might be part of the reason we’ve seen pretty dramatic price declines and yield increases in the 10-year Treasury note.
As has been broadly reported, the yield of 10-year notes above two-year notes has notably widened. There are fundamental reasons for this, of course. There’s more optimism about the economy, so leaving Treasurys for riskier and more rewarding investments is a natural consequence.
And as has been reported elsewhere, bond investors may again be donning their vigilante costumes, protesting the inflation harbinger they see in the massive budget deficits being built by the U.S. government.
But there’s also likely some non-fundamental attempt to prod the Federal Reserve and to see how it reacts to the rising interest rates. Those increasing 10-year rates run counter to the Fed goal of stimulating renewed economic growth via reasonable long rates and low mortgage rates.
“The market has built an expectation that the Fed will step in and buy more Treasurys and expand its program to support the markets,” Christian Cooper, interest-rate strategist at RBC Capital Markets, told The Wall Street Journal. “With that failing to materialize, investors are exiting.”
What the Fed does next – expand its direct purchases of longer-dated Treasurys or continue a go-slow approach – will have a lot to do with the near-term course of 10-year yields and prices.
It will also provide new data for bond traders trying to outthink the Fed at each turn. Welcome to the new world of government and markets.