Steven Goldstein is based in London and responsible for MarketWatch's coverage of financial markets in Europe, with a particular focus on global macro and commodities. Previously, he was Washington bureau chief, directing MarketWatch's economic, political and regulatory coverage. Follow Steve on Twitter: @MKTWgoldstein.
Long-term bond yields have been spiking, in response to the Federal Reserve letting its bond portfolio slowly roll off as the U.S. Treasury has been selling debt to fund the government’s spending.
“At the time, people thought it was a strange topic,” recalled Steve Hou, now a quantitative researcher for Bloomberg. He did say that some central banks including the Bank of Canada and the Cleveland Fed took notice. “The scenario which I envisioned, where we could end up a different regime where the stock-bond correlation will no long remain deeply negative, causing there to be a sharp price elasticity for bonds, seemed very far-fetched at the time.
And that’s what has happened. The Treasury set plans to borrow $1 trillion in the July-to-September quarter, and another $852 billion in the October-to-December quarter. The yield on the 10-year Treasury BX:TMUBMUSD10Y spiked 75 basis points in the third quarter, and the 30-year yield BX:TMUBMUSD30Y rose even faster. Bond yields, which move in the opposite direction to price, were surging once again on Friday after hotter-than-expected payroll growth.
“Is it possible that we fully reverse the 40 years of disinflation, and 10-year yields trending down from when Bill Gross got in the business? It’s possible, but I am not sure we are quite there yet,” he added.
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