The global bond rout intensified Monday, with Treasury yields touching the highest this year, on expectations that President-elect Donald Trump will increase government spending to boost economic growth and stoke inflation.
BlackRock Inc., the world's biggest money manager, said U.S. bond investors should favor Treasury Inflation-Protected Securities. The yield on the benchmark 10-year note touched 2.3 percent, the highest intraday level since December. The move marks a quick reversal — just four months ago, it touched a record-low 1.318 percent, surprising analysts who back in January predicted it would end the year at 2.75 percent.
The sell-off on Trump's election last week wiped a record $1.2 trillion off the value of bonds around the world as investors speculated the Republican would pursue stimulative fiscal policies. Yields on two-year notes, the coupon maturity most sensitive to monetary-policy expectations, rose above 1 percent for the first time since January as traders added to bets the Federal Reserve will raise interest rates next month. A bond-market gauge of inflation expectations touched the highest since April 2015.
"We see a postelection reflationary trend and a Fed willing to let inflation run hotter putting pressure on longer-term bonds," Richard Turnill, BlackRock's London-based global chief investment strategist, wrote in a post on the company's website Monday. "We prefer TIPS over nominal bonds."
Benchmark 10-year note yields jumped seven basis points, or 0.07 percentage point, to 2.22 percent as of 2:17 p.m. in New York, according to Bloomberg Bond Trader data. The 2 percent security due in November 2026 dropped 5/8, or $6.25 per $1,000 face amount, to 98.
Treasury two-year note yields rose seven basis points to 0.98 percent after climbing as high as 1.01 percent. U.S. 30-year bond yields rose five basis point to 2.98 percent and touched 3.01 percent, the highest level this year.
Technical indicators such as the relative-strength index are signaling the Treasuries sell-off may have gone too far, too fast. The 10-year yield's RSI rose to about 83 on Monday, touching the highest since 1990, with a number above 70 signaling yields may be overbought — or, in other words, that the notes may be oversold.
The gap between yields on 10-year Treasuries and equivalent-maturity TIPS, a measure of inflation expectations over the next decade, rose as high as 1.97 percentage points. TIPS have returned about 5.8 percent in 2016, vs. about 2.3 percent for conventional Treasuries, according to index data compiled by Bloomberg.
"We are reaching a paradigm shift in the bond market," Matt Eagan, a money manager at Loomis Sayles, which oversees $245 billion, said in an interview with Bloomberg Television. "Trump's policies, at least taking them at face value right now, are inflationary at a time when the slack in the economy is actually tightening and we have very aggressive monetary policy."
Traders assign about a 92 percent probability to a Fed interest-rate increase in December, according to data compiled by Bloomberg based on fed funds futures, up from 84 percent on Nov. 11. The calculation is based on the assumption the effective federal funds rate will trade at the middle of the new range after the central bank's next increase.
The rise in yields "can continue — we are still at low rate levels," said Priya Misra, head of global rates strategy at TD Securities (USA), one of 23 primary dealers that trade with the Fed. "Another 25 to 50 basis points on the 10-year is possible."
Investors should hold an underweight position in Treasuries, said Tuan Huynh, the Singapore-based chief investment officer for Asia and the Pacific at Deutsche Bank Wealth Management.
"The markets are clearly pricing in a big fiscal stimulus plan," Huynh said. "The Fed might need to react with stronger rate increases."
While the outlook for inflation is picking up, costs have yet to match the Fed's target.
Five-year inflation swaps indicate traders expect costs to increase at about a 2 percent pace, the highest level since September 2014. The swaps allow investors to exchange fixed interest rates for returns equivalent to a nation's consumer-price index.
The annual change in the price index for personal consumption expenditures has been less than 2 percent for years. The Fed identified this gauge in 2012 as the one it will use for its target.
Standard Chartered adjusted its forecast for 10-year Treasury yields to 3 percent at the end of 2017 from below 2 percent previously.
"Trump has introduced so much uncertainty — around the fiscal outlook, the outlook for foreign demand for Treasuries given his protectionism and his views on China, and uncertainty around the outlook for the Fed," said John Davies, an interest-rate strategist at Standard Chartered in London. "There's an uncertainty premium, rather than just expectations of much more Fed tightening" being priced in Treasuries, and "there's room for this to continue."