Long-term Treasury Yields Pull Back as Investors Return but 6% Tipping Point Looms

Long-term U.S. Treasury yields fell sharply on October 13 as investors piled back into the market, reversing a brutal stretch that had pushed the 30-year yield to 5.70%, its highest level since 2002. The rally was fueled in part by trader expectations that the Treasury Department will cut the size of its 20-year and 30-year bond auctions next month, reducing future supply pressure. The move lower in yields was steepest at the long end, with the 30-year down 3 basis points, the 20-year down 4 basis points, and the 10-year down 3 basis points, a pattern known as a bull flattener.

BlackRock added to the bullish momentum by ending its bearish bet on long-term U.S. bonds, a position it had held for most of the past six years. Pimco's Dan Ivascyn also struck a constructive tone, saying long-end Treasuries can absorb further Federal Reserve tightening. Meanwhile, the U.S. 6-month bill auction cleared at a high yield of 4.20%, above the prior reading of 4.165%.

Despite the intraday recovery, the threat of further selling hangs over the market. Bank of America's October survey found that investors broadly identified a 10-year yield of 6% as the threshold that would prompt a meaningful rotation from equities into bonds. Veteran bond strategist Harley Bassman warned that if the 20-year yield rises above 6% from its current level near 5.60%, futures-related hedging could trigger selling pressure equivalent to $110 billion in bond issuance. Bassman said negative convexity risks have reached levels not seen since 2007, which could amplify any selloff dramatically.