Treasuries’ Best Run Since 1995 Shows Traders Girding for Worst

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The world’s biggest bond market is holding firm in its conviction that the revival of the American economy from the devastation of the pandemic will be slow and fragmented.

Benchmark 10-year Treasury yields at 0.64% are barely changed from the end of March. Investors have pounced on any sell-off as a buying opportunity, keeping yields in check after they slid 125 basis points in the first quarter. The result is that Treasuries are up about 9% in 2020, on pace for the best first-half performance in the Bloomberg Barclays U.S. Treasury index since 1995.

The grim outlook among debt investors has mostly contrasted with the view in stocks. Shares roared back this quarter on expectations for a rebound in business activity, before fading last week amid surging infections and moves in some states to curtail reopenings. The upshot is that Treasuries will probably remain the haven of choice to hedge against the risk of another drop-off in economic growth — which may trigger further central-bank monetary accommodation.

“If we do continue to see some of the states needing to halt their phases of opening — or even reverse them — then you could see” lower yields in the coming weeks, said Jason Ware, head of trading at brokerage 280 CapMarkets. Given where the 10-year yield is, “it feels like maybe on the Treasury side that people are poised for that potential.”

This week’s economic data highlight, June payrolls, is expected to show a second straight sharp rebound in hiring. Employers are forecast to have added 3 million workers, following a gain of 2.5 million in May.

Still, the deep labor-market damage means the jobless rate will still likely be about 12.3% — down from its April peak but compared with 3.5% in February. The elevated level is why it may be difficult to significantly shift the prevailing narrative that the blow from the deadly virus will be long-lasting.

And with traders facing a holiday-shorted U.S. week, they may be even more focused on tracking the pace of the disease’s spread as a gauge of how much risk to take on. Florida and Texas halted drinking at bars on Friday amid a burst of new cases.

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin will testify to a House panel Tuesday, where they may lay out their efforts to support growth. The central bank has helped cap yields by buying $80 billion a month of Treasuries, a step it took to soothe markets after March’s turmoil. The Fed’s Treasury holdings have climbed about $1.9 trillion this year, to an unprecedented $4.2 trillion.

Treasuries are set for some mid-week support as the quarter ends. The surge in U.S. shares since March is expected to lead funds to re-balance portfolios by selling equities and buying fixed-income securities. Strategists at JPMorgan Chase & Co. say funds could unload as much as $170 billion of stocks.

“Much has been made about the relative performance of domestic equities versus fixed-income and what that implies for rebalancing flows as the books close on Q2,” BMO Capital Markets strategists including Ian Lyngen wrote in a note. “This dynamic is a short-term positive for Treasuries at the expense of stocks.”

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