Appetite for US Bonds as Safe Haven Rebounds After Global Yields Spike

There are bond markets outside of the US so frightening they make America look superlative by comparison. US Treasuries rebounded from an early sell-off Thursday, as decades-high yields on long-term government debt tempted an influx of buyers. Meanwhile, the allure of US government debt is strengthening with some money managers and retail investors, and traders signaled Thursday that they think Uncle Sam could provide safe haven from bond market tumult brewing elsewhere.

Give Them a 60-40 Chance

The yield on the 10-year Treasury note finished September with the biggest quarterly gain since 1994 and reached a 24-year high of 5.34% early Thursday. However, buyers quickly came calling after the initial selloff and the yield closed the day at 5.233%. A handful of supporting developments coalesced around their purchases.

First, a new Institute for Supply Management report revealed that economic activity in the US manufacturing sector grew slower than expected in September. Cooling in the white-hot American economy could give the Federal Reserve cause to hold off on additional interest rate hikes, which would steady the value of Treasuries. Fed Vice Chairs Philip Jefferson and Michelle Bowman offered support for that narrative, suggesting policymakers had more wiggle room. Any delay in hikes would mean less short-term upward pressure on yields from Fed policy.

Second, the global bond selloff reminded markets that US Treasuries are actually a safe haven. Look no further than France, where belt-tightening measures introduced in Prime Minister Sébastien Lecornu’s latest budget on Thursday failed to ease the market’s concerns about ballooning deficits and a deteriorating fiscal outlook. The spread between 10-year government bond yields in France and Germany reached the widest since the euro area’s early 2010s sovereign debt crisis. With global economic uncertainty piling up, investors expressed a preference for US and German bonds, which are viewed as relatively risk-free. Against the backdrop of higher Treasury payouts, there’s also evidence more and more corners of the market are reassessing bonds:

• The Wall Street Journal reported earlier this week that money managers are telling their clients to jump back into Treasuries and reawaken the classic 60-40 portfolio, arguing the high yields and cheap prices on long-term bonds are too sweet to miss out on. Halbert Hargrave Co-Chief Investment Officer Brian Spinelli told the paper “the biggest challenge is going to be psychological,” referring to investors still associating bonds with the near zero interest rate environment of the Covid era.
• A significant number of retail investors have gotten the message. JPMorgan noted in its latest weekly retail activity note that the iShares 20+Year Treasury bond ETF saw its largest inflows ever, indicating the 30-year bond yield is in the sweet spot as far as the new rush of retail traders are concerned.

Home Evasion: Everything else aside, the turbulent waves caused by bond market mayhem are making potential homebuyers seasick. The average 30-year fixed-rate mortgage rate rose the most in four years this week to 7.28%, according to Freddie Mac data released on Thursday.