Yields Set to Slump With Traders Seeking Havens

Bond traders are expecting Treasury yields to slide when the cash market reopens from a US holiday.

(Bloomberg) — Bond traders are expecting Treasury yields to slide when the cash market reopens from a US holiday.

The futures market, open for its usual hours on Monday, surged as concern around conflict in the Middle East fueled a flight to quality. The 10-year note contract was higher by around 30 ticks as of 2:30 p.m. in New York, indicating a decline in yields of approximately 15 basis points versus Friday’s 4.80% close. Exchange—traded funds tracking Treasuries also got a lift.

Treasury futures took their lead from European rates, which rallied hard on the day. German 10-year yields slid 11 basis points while rates on UK gilts fell almost 10 basis points.

Among ETFs, the iShares 20+ Year Treasury Bond ETF (TLT) climbed as much as 1.9% in its biggest intraday gain since August. Still, the world’s largest long bond ETF is mired in its worst drawdown on record, down roughly 50% from its 2020 highs.

Monday’s risk-off backdrop also saw investors downgrade the likelihood that the Federal Reserve will hike again. Traders are now pricing around 5 basis points of rate hikes for the November meeting — a roughly 20% chance of a 25-basis-point move — down from 9 basis points priced at Friday’s close. 

That move was supported by a series of dovish comments from Fed officials, which also further supported Treasury futures and pressured the US dollar lower. Dallas Fed President Lorie Logan said higher yields may mean less need for rate hikes, while Fed Vice Chair Philip Jefferson said officials are “in a position to proceed carefully in assessing the extent of any additional policy firming that may be necessary.”

Price action on the day was on thin trading volumes. As of 2:30 p.m. New York futures were running at around 35% of usual 20-day average levels.

–With assistance from Emily Graffeo.

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