Last week ended poorly for the bond market with yields jumping to new one year highs. It was also the first full week with 10yr yields trading above 2019’s low yield of 1.44%. Despite the break of the 1.62% ceiling, yields stayed fairly close, and they remain close to begin the new week (1.614% at 9am).
This leaves us in the familiar position of “still trying to establish/confirm a ceiling” after the selling trend that began last August and accelerated abruptly in 2021. 1.62 still has a chance (although it would have to be called 1.62-ish at this point), but more than a few traders have been throwing around numbers like 1.75%. Odds would improve dramatically as yields approach 1.95%, both because of the nearby psychological barrier at 2% and its role as a critical pivot point in late 2019.
That “pivot point” behavior (acting as a floor in the summer of 2020, then as a persistent ceiling in Nov/Dec) is the reason that 1.95% is part of the “hitch” zone–the range of yields that was/is most likely to contain the next major ceiling bounce.
If bonds hope to find that ceiling in the lower part of this range, traders will almost certainly need to see the Fed extend its temporary SLR (supplemental leverage ratio) rules for big banks. These rules went into affect on April 1st, 2020 and they allow big banks to buy more Treasuries (by not counting Treasuries against banks’ leverage ratios–a cap on lending/bond-buying, essentially).
The program is set to expire in 2 weeks. There is widespread speculation (but not certainty) that the Fed will extend it. Either way, it’s sure to come up in this week’s post-Fed-Announcement press conference. It could even be announced formally at 2pm on Wednesday afternoon. The bond market likely has a bit of rallying or selling to do, depending on the outcome. To be clear, if the Fed formally extends the SLR exemption, bonds are more likely to rally. If Powell is asked about it and downplays extension possibilities, bonds are likely to sell-off.