US gov't bonds: plenty of arguments to worry about

The latest press reports show that the midterm election race is too close to call, so the bond market is becoming more anxious

Markus Allenspach, OpinionIndustry Expert
Markus Allenspach is Head of the Julius Baer Fixed Income Research team and a member of Julius Baers Investment Committee. Markus joined Julius Baer through the acquisition of SBC Wealth Management in 2005, where he had worked in various management positions in Research since 1999. Prior to this engagement, he was Head of Currency & Fixed Income Research at UBS Investment Bank in Zurich. He graduated in Economics at the University of St. Gallen in 1983.

November 5, 2018

The yield of the benchmark 10-year Treasury note stood at 3.21 percent at the time of writing, getting closer to the high of 3 October of 3.23 percent.

Back then, a surprisingly hawkish comment from Fed Chairman Powell sent yields to a seven-year high. This time, the move is driven more by fundamental and political factors.

To start with, we have seen an acceleration of wage growth to 3.1 percent, a four-year high. The US Treasury had lifted the size of the auctions for the fourth time this year, reflecting the ever-increasing financing need of a government that has cut taxes aggressively without compensating cuts in expenditures.

This week, the market faces auctions totalling $83 billion alone, which is a very big chunk to swallow at a time in which the Federal Reserve is reducing its holdings.

Last but not least, we are waiting for the outcome of the mid-term elections. For a long time, the bond market has discounted a “blue wave”, i.e. gains of the Democrats, and counted on their opposition against further tax cuts.

The latest press reports show that the race is too close to call, so the bond market is becoming more anxious about the possibility of further tax cuts under a “status quo” regime.

Any opinions expressed here are the author’s own.

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