US Treasuries Surge amid Tech Sell-off, Safe-Haven Demand
US Treasuries experienced a notable rally on Monday as investors sought refuge in safe assets amidst a steep decline in equity markets attributed to concerns surrounding technology firms.
Yields Decline
The yield on 10-year US bonds plummeted by 12 basis points, marking the largest drop in nearly two weeks, reaching 4.50%. Similarly, the policy-sensitive two-year rate fell 10 basis points to 4.17%, the lowest level in over a month.
Haven Currencies Gain
Demand for haven currencies surged. The Japanese yen appreciated by 1.5% to 153.72 per dollar, reaching its strongest point in over five weeks. The Swiss franc also gained 1% to 0.8965 per dollar.
Tech Sell-off Triggers Bond Rally
The sharp decline in tech stocks, sparked by concerns raised by the emergence of an advanced AI model developed by Chinese startup DeepSeek, contributed to the rally in bonds.
"There's a high level of concentration in equity markets on certain stocks, unprecedented in nature," stated Ella Hoxha, head of fixed income at Newton Investment Management. "This could pose market-driven risks and support bonds for now."
Market Volatility and Fed Expectations
The bond gains occurred ahead of a potentially volatile week for markets, influenced by the Federal Reserve's monetary policy decision on Wednesday and ongoing tariff negotiations.
Investors remain uncertain following the weekend dispute between President Donald Trump and Colombia, resulting in the latter's agreement to accept migrant returns to avert hefty levies.
"This incident underscores that tariffs are a negotiating tool, but markets need to account for volatility associated with such announcements," said Mohit Kumar, chief economist and strategist for Europe at Jefferies International.
Weak Dollar, Increased Risk Appetite
The US dollar exhibited a mixed performance against major peers, with a broad gauge of its strength declining. Demand for foreign-exchange options rose, indicating increased demand for long-volatility exposure.
Fed Rate Expectations
European bonds also benefited from the risk-averse sentiment, with the German 10-year yield falling by eight basis points to 2.49%. Swaps indicated a full pricing of two quarter-point reductions from the Federal Reserve this year, and wagers on a March cut increased.
However, Fed officials are widely expected to maintain rates this week, given that inflation remains above targets and the trajectory of Trump's economic policies remains uncertain.
Clarity May Emerge Later in 2023
Lauren van Biljon, portfolio manager at Allspring Global Investments, suggested that clarity may only emerge in the second quarter following the completion of the trade policy review initiated by President Trump.
Bond Yields and Inflation
US yields had risen earlier in 2023 amidst heightened expectations for monetary policy tightening due to speculation that Trump's policies would fuel inflation.
"At these 5% levels, there's some value to be had," said Newton's Hoxha. However, she cautioned that the new administration's fiscal policies, including tax and spending, could still present challenges for bond markets.
Fed Easing Bets
Despite concerns, certain investors, including Pacific Investment Management Co., anticipate that the Fed will implement easing measures and are investing in short-maturity Treasuries.
Morgan Stanley strategists suggest that this week's policy decision could further drive yields downward.
"Lower inflation than feared, less growth than expected, and a Fed that cuts rates more than priced into markets should lead to lower US Treasury yields," they wrote.