Treasury yields fell from their highs on Monday as bond fund managers bought debt as part of routine rebalancing operations before the end of a month, capping off a volatile month that saw long-term government bond rates turn higher after staging a breathless rally in August.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, +0.16% was virtually unchanged at 1.678%, but was up 17.2 basis points for the month, marking its biggest monthly rise since September 2018.
The 2-year note yield TMUBMUSD30Y, +0.17% was also flat at 1.624%, leaving it up 11.6 basis points in September. The 30-year note yield TMUBMUSD02Y, +0.76% edged higher by 0.8 basis point to 2.119%, contributing to a 15.1 basis point weeklong climb.
For the quarter, the 10-year yield declined 32.5 basis points and the 2-year yield fell 11.5 basis points. The longer 30-year bond yield tumbled 40.9 basis points between July to September, marking its biggest quarterly drop since the fourth quarter of 2014.
What’s driving Treasurys?
Bond yields fell on quarter-end and month-end rebalancing when money managers top up on government paper to maintain the average maturity of their portfolios before the end of September. When debt rolls off a bond-fund portfolio, the average maturity will fall, drifting away from the maturity of their competing benchmark index.
Yields rose in early-morning trading after the Bank of Japan published its October schedule for its bond-buying operations, indicating it could cut the size of its purchases across a range of maturities compared with September. The move is potentially part of the central bank’s efforts to steepen the slope of the yield curve, widening the spread between short-term and longer-term rates.
As part of the central bank’s signature yield-curve control policy, the BOJ adjusts its bond buying to keep the 10-year yield at around 0%, but this year’s global bond rally has pushed the benchmark rate well below its target. By keeping longer-term yields higher than their short-term peers, the central bank aims to ease pressures on the financial sector, as its margins come under pressure from the BOJ’s policy of ultralow interest rates.
The 30-year Japanese government bond yield TMBMKJP-30Y, +10.37% rose 4.4 basis points to 0.365%.
Elsewhere, European Central Bank President Mario Draghi advocated for additional fiscal policy, in an interview with the Financial Times.
In economic data, eurozone employment rate fell to 7.4% in August from 7.5% in July, marking its lowest level since May 2008.
As for the U.S., the Chicago purchasing managers index for September fell for the third time in four months to 47.1, signaling ongoing struggles for U.S. manufacturers. Any reading above 50 is considered an expansion of activity.
What did market participants’ say?
“Quarter-end regularly spells portfolio reshuffling and profit-taking,” wrote Axel Botte, a strategist at Ostrum Asset Management.
“This is a big deal that the BOJ is actually now rooting for higher longer term rates. Imagine that, but the pain in their banking system has finally gotten them to wake up,” wrote Peter Boockvar, chief investment officer of Bleakley Advisory Group.