A surge in US Treasury yields to their highest levels since 2007 has pushed the S&P 500 down 0.25% to 7,651.54, as forced selling by leveraged funds feeds a self-reinforcing "vicious loop" in the bond market. Traders now await Friday's jobs report after softer-than-expected inflation data pushed down the odds of an October rate hike.
Treasury sell-off spills into stocks
The S&P 500 slipped 0.25% to 7,651.54 on Tuesday, while the Dow Jones Industrial Average fell 0.86% to 50,906.05 and the VIX volatility gauge jumped 1.87% to 16.34. The moves came as the 10-year Treasury yield climbed to 5.3%, its highest level since June 2007, after surging more than half a percentage point this month. That puts US government bonds on course for their worst month in four years.
A feedback loop investors can't stop
Big investors say the sell-off has now become self-feeding. Rising yields are forcing hedge funds and real estate investment trusts holding mortgage-backed securities to dump long-term Treasuries, which pushes yields higher still and triggers further forced selling, according to Matthew Scott, global head of trading at AllianceBernstein. A similar dynamic is playing out among leveraged funds rebalancing large positions in the Treasury futures market, Barclays analyst Amrut Nashikkar said.
According to the Financial Times: "It's this vicious loop. And you have to wonder what is going to break it." Daniel Gottlander, head of North America swaps trading at Citi, added that no buyer has stepped in to stabilize the market.
Inflation data eased, but yields kept climbing
The personal consumption expenditures price index rose 3.4% year over year in August, holding steady against forecasts for a jump to 3.7%. Core PCE, which excludes food and energy, posted an annual gain of 3% versus a 3.3% forecast. Even so, Treasury secretary Scott Bessent's move to expand the department's bond purchases in August has failed to halt the selling.
The softer inflation print did shift rate expectations, however. Traders now price a 37% chance of an October rate hike, down from more than 80% earlier this month, pushing the next expected move to December. Attention now turns to Friday's September jobs report, where economists expect the economy added 84,000 jobs; a hotter-than-expected print could send yields higher again.
Sources: Financial Times, CNBC, MarketWatch (snippet-based)
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