NEW YORK, April 15- A sharp drop in U.S. Treasury yields in the face of strong economic data is surprising market participants who expected the reflation-driven bond saleoff of the first quarter to continue.
Fed officials noted their biggest drop since Wednesday, even as retail sales in March came in much better than expected and jobless claims fell.
Normally, strong data would bolster the case for economic recovery and inflation, increasing the attractiveness of bonds and selling yields higher.
All told, the yield on the benchmark 10 year Treasury has fallen in April nearly 20 basis points, helping to reverse some of the fresh increase in February and March and boosting a rally in growth and technology shares that helped send markets to dramatic records. On Thursday, the 10-year yield fell to a one-month low of 1.528%.
Yes, the move to the Treasuries was certainly contrary to expectations, said Piper Sandler, managing director at Justin Hoogendoorn. A selloff appeared inevitable with the rise in retail sales of 9.8% in March.
Investors gave a broad range of reasons for the move, including an unwind of bearish bets on Treasuries, safe-haven buying in the face of increased tensions between Russia and Ukraine and increased appetite for U.S. debt among foreign buyers.
John Briggs, Global Head of Strategy at NatWest Markets, thinks some investors could already have factored in a strong economic rebound, accounting for the rise in yields earlier in the year.
The market has generally said that the U.S. is accelerating more quickly than originally expected, he said. We 've now reached a point where there's some stability from the selloff and you 're going to see some appetite coming back into the market.
The speculators trimmed their net bearish bets on US 30 Treasury bond futures in the week to April 6. Their net position on the U.S. 10 year notes flipped from a net long to a net short, the data showed.
It is sometimes telling that it is not necessarily economic data that is driving this and other issues to the point of which is economic. It's more positioning and expected change in terms of acquisition base, said Chuck Tomes, Associate Portfolio Manager at Manulife Asset Management in Boston.
The macro and quant strategist Masanari Takada recently noted a course correction away from bear trades in the Treasury market.
According to the estimates from our model, it seems likely that global macro hedge funds have already closed the entirety of their net short position in USTs and may have gone directly to the aggregate net long side, Takada said in a note on Tuesday.
Rising tensions between the U.S., Russia and China could also be taking some buyers back to the Treasury market as a safe haven given the short-lived rally in the equities over the last six months, said Scott Kimball, co-head of fixed income at BMO.
The fiscal risks are mounting, the income gap between net savers and those living paycheck to paycheck is continuing to grow, and geopolitical stimulus has been too late or at least behind the curve, he said.
Some investors have also pointed to greater demand from Japanese investors, including foreign buyers. The 1 April marked the start of a new fiscal year in Japan, ending a period of portfolio readjustment in which investors sold off Treasuries.
The previous move to raise rates at the beginning of the year is also likely to attract buyers attracted by higher returns, said Robert Sears, chief investment officer at Capital Generation Partners.
In this yield-starved world, rates do n't have to go up much for the trade to become attractive, he said. What are some good ways to promote you, or work with me on improving your story?