The yield on the 10-year U.S. Treasury climbed 7 basis points today to 2.55%. That’s the highest yield since March. That prompted bond guru Bill Gross to declare that we have entered a confirmed bear market in bonds with the upward trend lines for bond prices of 25 years broken for 5-and 10-year Treasuries.
The bond market is indeed being hit by worrying news from several different directions. Today the Bank of Japan announced that it would cut purchases of long-dated bonds that had been conducting as part of its program to push up inflation and weaken the yen. That puts the Bank of Japan among the large group of central banks, including the Federal Reserve and the European Central Bank, that are moving to less accommodative monetary policies.
The timing of that announcement from the Bank of Japan could have been better too, as far as global bond markets were concerned. The United States, Japan, the United Kingdom and Germany are scheduled to sell $60 billion in bonds this week. The U.S. makes up the bulk of those sales with a $24 billion offer of three-year notes scheduled for today and another $20 billion set for Wednesday. That’s a lot of issuance for bond buyers to absorb–and is likely to push yields at least a bit higher.
This week’s Treasury sales are just the beginning of what is likely to be a big year for issuance of Treasury bonds as the federal government looks to fund a larger deficit created by the recently passed tax bill. At the same time the Federal Reserve is reducing its own bond buying–or actually bond rebuying as it slows its purchases of bonds to replace those maturing in its portfolio.
The median forecast in a recent Bloomberg survey was for the yield on the 10-year Treasury to hit 2.92% by the end of 2018.
Now I know that we’ve heard calls for bond yields to rise significantly before–and they’ve turned out to be mistaken. But that doesn’t mean they’re wrong this time. The ducks do look lined up in a row for exactly that kind of increase in yields and decrease in bond prices.