It was already a jittery day for fixed income investors, with a bond rout which started after today’s French auction was poorly received, unleashing a selling scramble and sending Bund yields above 0.50% for the first time since January 2016, and breaking out above a key support level, then crossing the ocean and slamming both US stocks and bonds. And according to Jeff Gundlach, who recently doubled down on his vocal bond bearishness on Twitter…
US 10-year yield above 200-day moving average, broke downtrendline from March. Critical level now 2.32%, probably coincides with 0.50% Bund.
— Jeffrey Gundlach (@TruthGundlach) June 30, 2017
… this is just the beginning. In an email to Bloomberg, Gundlach said that 10Y yields are on course to move “toward 3%” this year. There has “been no justification for the divergent policies in the U.S. versus Europe given economic fundamentals,” he said – a point he has made previously. A 10-year yield at 3 percent would put Treasuries in “definitive” bear market territory, Gundlach added. The 10Y traded as high as 2.39% on Thursday, just 3 bps below the key retracement of 2.42%, coinciding with the May high. The yield is alos just shy of the 100 DMA, whose breach could lead to more systematic and CTA selling.
Not only Gundlach is bearish on the market: looking at the market internals, Bloomberg writes that 30Y yields surged as much as 7 bps to 2.92% breaching both 50- and 200-day moving averages.
Discussing today’s selloff, FTN’s Jim Vogel said the “the dam broke” in German 10-year bunds and “the cascade quickly flooded sell orders into 10-year futures, with the biggest ‘emergency’ overnight volume in months.”
Additionally, September long-bond futures open interest has “dropped by around $3.7 million since June 28 in dollar-value per basis point move, or DV01, terms, a sign bulls are starting to liquidate positions in the sector. Speculators in recent weeks were the most bullish on 30-year Treasury futures on a net basis this year, according to CFTC data.”
Furthermore, Bloomberg notes that with yields approaching key technical levels that could trigger a fresh flush out of long-end bulls, the risk is building that Treasury yields go even higher.
Curve positioning may also fuel liquidation in the long end as traders start to unwind overcrowded flattener trades. The spread between five- and 30-year yields is hovering near 95 basis points, near the narrowest since 2007.
Brean Capital’s Peter Tchir also chimed in: “People this year had been buying long-dated Treasuries and other sovereigns as the hedge to their equity portfolios and that’s why this unwind is so ugly. They are losing money on both the equity and debt side now, and are bailing out of their long-dated Treasuries.”
Which of course is a problem first and foremost for risk parity funds, which tend to get in trouble when there is a concurrent selloff in both stocks and bonds at the same time. In fact, as we showed earlier, the deleveraging across the Risk-Par community started earlier and was a continuation of substantial weakness seen in recent days.
Just like last Thursday, the question is simple: will the Risk-parity deleveraging cascade end in time before it results in more systematic funds getting dragged into the coordinated selling, unleashing a bloodbath.
As for Gundlach, he was content with being proven right: one week after his June 30 tweet, he had this to say: “There you have it. US ten year closes twice over 2.32%, and Bunds spike above 0.50%. Remember the “yields can never rise mantra” 1 year ago?”
There you have it. US ten year closes twice over 2.32%, and Bunds spike above 0.50%. Remember the “yields can never rise mantra” 1 year ago?
— Jeffrey Gundlach (@TruthGundlach) July 6, 2017