September is stacking up to be the worst month for total returns on U.S. government debt of the past year.
Thursday’s further selloff in long-dated Treasurys is pushing the 10-
BX:TMUBMUSD10Y
and 30-year yields
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to levels that haven’t been seen in a dozen years or more. Rising yields reflect a diminishing price on the underlying securities, and hit existing holders of Treasurys the hardest.
Source: Bloomberg, FHN
There are still two more trading sessions left to go for the month — Thursday’s and Friday’s — but it’s not looking good.
Based on the Bloomberg U.S. Treasury Total Return Index, which bond traders use to measure their own performance, Thursday’s selloff leaves Treasurys on track to end September with bigger losses than those seen in February of this year.
The Bloomberg index is down 2.5% for the month as of Thursday morning, surpassing February’s 2.34% drop. The index does not reflect outright changes in prices across Treasurys. Rather, it uses adjustments to standardize the results and to help better capture what the universe of U.S. government debt did over a given month.
This month’s bearish momentum in government debt “has been relentless, with an especially significant selloff the past week” following the Federal Reserve’s Sept. 20 policy decision, said macro strategist Will Compernolle of FHN Financial in New York. “Markets are showing more confidence in the Fed’s message of a ‘higher for longer’ fed funds rate.”
Back in February, the month prior to the collapse of California’s Silicon Valley Bank, a blockbuster nonfarm payrolls report for January and still-hot inflation report for the same month had traders and investors revising their expectations in the direction of further tightening by the Federal Reserve.
“What caused a lot of the Treasury weakness in February was in the shorter end of the curve, with changing fed funds rate expectations,” Compernolle said via phone on Thursday. “Now, in September, the changes are at the longer end of curve on a fed funds rate that’s higher for longer and inflation.”
“When we talk to banks, they are trying to stay steady and are not adding anything to their balance sheets,” he said. “They are in a compressed net-interest margin world where they’re just trying to survive until the Fed starts cutting rates because the wiggle room for taking risks is so narrow.”
Thursday’s selloff in Treasurys moderated during the New York afternoon, after having pushed 5- through 30-year yields closer to 5% earlier in the day. Meanwhile, all three major U.S. stock indexes
DJIA
COMP
moved higher, led by a 1.2% jump in the Nasdaq Composite.