September has been a brutal month for US Treasuries, and historical trading patterns suggest investors may not get much respite as October begins.
The selloff pushed the yield on the benchmark 10-year US Treasury note above 5.3% on Wednesday, surpassing its 2007 peak and reaching its highest level since 2002, according to Tradeweb.
The 30-year Treasury yield also climbed above 5.6%, reaching a multi-decade high.
The Bloomberg US Aggregate Total Return Index, widely tracked through the AGG exchange-traded fund, fell more than 2.5% in September, according to Dow Jones Market Data.
It was the index’s biggest monthly decline since at least April.
October has historically been difficult
The latest selloff is occurring at a particularly challenging point in the calendar for fixed-income investors.
Since 2000, September has ranked among the weakest months for the AGG, with October historically recording an even larger average decline.
A weak September has also frequently been followed by another monthly loss in October.
The pattern has become more pronounced over the past decade.
The AGG recorded consecutive September and October losses in 2016, 2018, 2020, 2021, 2022 and 2023.
Bloomberg data show that over the past decade, Treasuries have posted a median loss of about 0.9% in September, followed by a 0.7% median loss in October.
That does not mean bonds fall by those amounts every year, but rather that those are the middle outcomes across the historical sample.
Prashant Newnaha, strategist at TD Securities, said the market’s recent performance could leave investors facing further pressure.
“It’s been a train wreck in rates over September and the pain trade may continue,” Newnaha said in a Bloomberg report.
“As long as there is no Middle East resolution, there is a risk that we see ongoing de-risking in fixed income and it could spread to equities as well.”
Masahiko Loo, senior fixed-income strategist at State Street Investment Management, described October as a “seasonal test” for Treasuries as government bond supply increases and investors return from the summer lull.
“Going into Thanksgiving, the combination of renewed Treasury supply, heavy credit issuance and relentless AI capex demand suggests competition for capital remains intense, keeping the risk of further Treasury volatility elevated,” Loo said.
Fundamental forces add to pressure
October’s seasonal weakness could coincide with several fundamental forces that are already pushing yields higher.
The enormous investment required to build artificial-intelligence infrastructure is becoming an increasingly important source of competition for capital.
Technology companies are committing hundreds of billions of dollars to data centers, chips and related infrastructure, potentially drawing funds away from government debt.
At the same time, the US government continues to borrow heavily, adding to the supply of Treasuries that investors must absorb.
The result is a market in which investors are demanding higher yields to hold longer-dated government debt.
Inflation and Fed expectations remain central
Inflation is another major factor behind the rise in yields.
Energy prices have added to concerns that inflation could remain elevated, particularly as geopolitical tensions in the Middle East create uncertainty around oil supplies.
The US 10-year yield has also been supported by expectations that interest rates may remain higher for longer.
Yet the outlook for the Federal Reserve is not uniformly hawkish.
US traders on Wednesday reduced their expectations for an October rate increase after the Federal Reserve’s preferred inflation gauge came in softer than expected.
The shift provided some relief to shorter-dated Treasuries, although longer-term yields remained elevated.
The US economy has also proved more resilient than many investors expected.
Stronger economic activity reduces demand for defensive assets and can keep pressure on bond prices.
Yardeni Research has also pointed to an unwind of the yen-funded carry trade as another factor contributing to the bond selloff.
The strategy involves borrowing in yen at relatively low rates and investing in higher-returning assets elsewhere.
When investors unwind those positions, they can sell a range of assets and contribute to broader market volatility.
Some investors see value emerging
The bond market’s losses are beginning to create a different argument: that bonds have become attractive to buy at these levels.
Bonds offer substantially higher income than they did during the years of ultra-low interest rates.
For investors buying at today’s yields, the higher coupon income can provide a buffer against future price declines if yields rise further.
Wall Street veteran Jim Bianco has turned bullish on US Treasuries for the first time in six years, while longtime bond investor Chris Iggo has argued that bonds could rebound after four difficult years.
JPMorgan Asset Management money manager Arjun Vij said the increase in real yields over the past year “has created more value” in global government bonds.
“At current levels, duration appears broadly fairly valued,” Vij said in the Bloomberg report.
He sees opportunities in longer-dated bonds in the US, Japan and Australia, where he said “we see the most attractive risk-reward today.”
Andrew Krei, chief investment officer at Crescent Grove, said wealth managers are also hearing more from clients looking at the bond market after the sharp rise in yields.
“I think people are looking at the headline number and saying 5%, 6%, 7% is looking really attractive after we’ve had such a strong run in equities,” Krei told MarketWatch.
Higher yields come with a trade-off
The attraction of Treasuries at these levels ultimately depends on what happens to yields next.
If yields stabilize or decline, investors buying bonds now could benefit from both income and price gains.
But if inflation remains elevated, government borrowing continues to rise and investors demand still higher yields, newly purchased bonds could suffer mark-to-market losses.
Blerina Uruçi, chief US economist at T. Rowe Price, said the near-term outlook could remain volatile but pointed to a longer-term shift in the market.
Bonds could be volatile in the near-term, but “the trend in yields is upward,” Uruçi said.
“There are many factors driving yields higher that are structural, and those factors are here to stay.”
For Treasury investors, October therefore arrives with two competing forces: a historical tendency for bonds to struggle and yields that are increasingly attracting investors looking for income.
Whether higher yields ultimately mark the beginning of a new era for fixed income or an opportunity created by an overshoot will depend on the path of inflation, government borrowing, economic growth and Federal Reserve policy.
This post Treasuries likely to stay volatile in October: should you buy bonds at 5%+ yields? may be modified as updates unfold
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