Bond Report: Treasurys sell off as investors rush to raise cash

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U.S. Treasury yields jumped on Wednesday as investors rushing to sell liquid Treasurys to raise cash amid worries about the extra flood of debt being issued by governments to finance fiscal stimulus packages to combat the economic impact of the coronavirus epidemic.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +3.77%   climbed 10.9 basis points to 1.103%, a day after the benchmark maturity recorded its biggest one-day climb since September 2008. The 2-year note rate TMUBMUSD02Y, -4.24%   was virtually unchanged at 0.456%. The 30-year bond yield TMUBMUSD30Y, +1.10%   surged 15.2 basis points to 1.726%. Bond prices move in the opposite direction of yields.

What’s driving Treasurys

Investors noted that both bonds and stocks were selling off in sync, an unusual trading pattern that reflected how government debt failed to act as a haven asset in several sessions since the COVID-19 epidemic rattled investors.

Futures for the S&P 500 SPX, +6.00%   and the Dow Jones Industrial Average DJIA, +5.20%   point to a lower open for Wall Street on Wednesday. Both benchmark indices are down more than 20% year-to-date.

See: U.S. businesses need a $2 trillion bailout fund to avoid a possible ‘global depression,’ says Guggenheim’s Minerd

Some analysts suggested the poor recent performance of long-dated government paper is down to expectations for a massive fiscal stimulus package, which could overwhelm the bond-market with new debt supply.

But others argued the more likely reason was that investors were looking to raise cash, with many selling their most liquid assets first such as government bonds. On top of that, the traditional middlemen of the bond universe, the primary dealers, have been unwilling to buy and sell Treasurys in their usual manner in the face of the whipsawing market action.

Late Tuesday the Federal Reserve said it would relaunch a crisis-era facility that allows large financial institutions access to short-term loans. The Primary Dealer Credit Facility, originally established in 2008, will seek to tamp down strains in funding markets by expanding loans to the 24 large financial institutions known as primary dealers, which function as the Fed’s exclusive counterparties when trading in financial markets.

What did market participants’ say?

“These [selloff in government bonds] could reflect the fact that funding stresses, or a rush for liquidity, are obscuring the fundamental signalling effect of core debt,” said analysts at RaboBank.

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