Bill Gross’s bond bear market looms as 10-year yield nears 2.6%
Bill Gross speaks at the Morningstar Investment Conference in Chicago, Illinois, June 19, 2014. (Jim Young/Reuters)
To Bill Gross, the bear is about to roar in the $13.9-trillion Treasuries market.
Benchmark 10-year yields reached 2.58 per cent Wednesday, the highest since December, on a report showing unexpectedly strong hiring in February. They’re approaching the 2.6-per-cent mark that Gross, the bond-market veteran at Janus Capital Management, said will signal the start of a bear market, should it hold on a weekly basis.
From Fibonacci technical analysis to the potential for a pickup in mortgage-related hedging, there’s plenty of backing for that as a crucial level. What’s more, traders in short-term interest rates are geared up for a hawkish message from next week’s Federal Reserve meeting. If they’re right, yields could be set to surge.
Ten-year yields have practically doubled since touching a record low 1.32 per cent in July. The losses accelerated after Donald Trump won the presidency in November with promises of tax cuts, deregulation and fiscal spending. Fed signals that a rate hike is likely next week spurred the latest leap in yields.
“If the 10-year breaks 2.6 percent on a weekly or on a monthly basis, because it’s so strong and so important in terms of technical analysis, that if and when it’s broken on the upside, it’s a bear market,” Mr. Gross, who manages the $1.9 billion Janus Global Unconstrained Bond Fund, said in January. He didn’t respond to a request for comment Wednesday.
Mr. Gross has said the threshold is a more important financial-market barometer than the Dow Jones Industrial Average passing 20,000, which it did Jan. 25. Other bond titans, like DoubleLine Capital Chief Executive Officer Jeffrey Gundlach and Guggenheim Partners Chief Investment Officer Scott Minerd, have said a U.S. 10-year yield of 3 per cent is when the bear market begins. Gundlach said Tuesday in a webcast that it may fall to 2.25 per cent before climbing.
Those who follow technical analysis in Treasuries acknowledge that 2.6 per cent is an important level to watch.
Fibonacci analysis shows that 2.64 per cent is a key retracement level for the bull market of the past few years. If it breaks, yields could complete a full retracement of the entire cycle, implying a test of an area just above 3 perc ent, the high of 2013.
Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings, said he’s not so certain that breaching 2.6 percent spells doom for the market. He said Wednesday that he’s betting the 10-year yield doesn’t break past 2.62 per cent for now. Ian Lyngen and Aaron Kohli at BMO Capital Markets see a “big support” at 2.639 per cent — the intraday high on Dec. 15 — that will halt losses.
Wednesday’s 10-year note auction showed there’s plenty of interest in the debt at these levels. The bid to cover was the strongest since June.
The market for U.S. dollar-denominated swap spreads is also flashing signs that 2.6 per cent is critical. Morgan Stanley’s Ted Wieseman has said reaching that point would trigger convexity-related paying, exacerbating the selloff in Treasuries as portfolios offset extended MBS duration. Convexity hedging occurs as mortgage rates rise, making borrowers less likely to refinance.
The benchmark 10-year note yielded 2.55 per cent at about 1:55 p.m. in New York, extending an eight-day selloff that’s the longest since March 2012.
The market sees a hike at the Fed’s March 14-15 meeting as a virtual certainty. Traders are pricing in just short of three rate increases this year, according to fed funds futures data compiled by Bloomberg.
Traders in eurodollars, which are highly sensitive to the path of Fed rates, remain short, the latest CFTC data show. These bets could be rewarded if the Fed changes its rate projections, known as the “dot plot,” to show a more aggressive path, a scenario that may add fuel to the bearish move further out the curve too.