Treasury yields jump in catch-up to European bond selloff

U.S. Treasuries are breaching key levels as this week’s global debt selloff sends yields to their highest in about a year.

While U.S. markets were closed on Monday for President’s Day, German bunds and U.K. gilts both saw benchmark yields gain five basis points as a significant slow-down in virus cases, progress on vaccine roll-outs and higher oil prices bolstered stock markets and proponents of the reflation trade.

After they reopened on Tuesday, Treasury 10-year yields rose four basis points to touch 1.25% — the highest since last March — while the 30-year equivalent pushed above 2%.

These are sad tidings for investors who snapped up some $68 billion of 10- and 30-year debt in Treasury auctions last week, at yields almost 10 basis points lower than current levels.

Strategists at TD Securities have warned that further increases in yields could prompt offsetting flows in swaps, which have in the past created even more upward pressure. Hedging of mortgage bonds, often known as convexity hedging, could materialize if 10-year Treasury yields continue to rise past 1.30%, they note.

The global reflation trade has gotten another bump as oil futures continued to advance, closing in on 13-month highs as extreme weather conditions caused some of the biggest refineries in North America to shut down.

In every major market, stocks rallied strongly to start the week. Japan’s Nikkei Index broke above 30,000 for the first time since 1990, while S&P Index futures printed another record high on Tuesday.

In the U.K., 30-year bonds were the worst performers on Monday. Yields rose seven basis points as the FTSE 100 stock index climbed more than 2.5% after the country hit a milestone in its vaccination program, supporting calls for easing of social restrictions.

The selloff was broad, with even Italian bonds — which would typically outperform safe haven assets such as German bunds when credit spreads tighten and stocks climb — under pressure. The announcement of a new 10-year benchmark bond sale to take place via syndication saw yields also advance five basis points.