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The recent bond selloff is threatening hopes for a soft landing for the U.S. economy, as traders prepare for borrowing costs to remain higher for longer, while fears over the widening federal deficit continue to mount.
Bonds that mature in 10 years or more have slumped 46% since peaking in March 2020, according to Bloomberg data, slightly below the 49% plunge seen in U.S. stocks after the dot-com bust.
“The magnitude of the bond selloff has been so stunning that stocks are arguably more expensive than a month ago,” said Barclays. “In the short term, we can think of one scenario where bonds rally materially – if risk assets fall sharply in the coming weeks.”
It noted that the Federal Reserve may not ease up on quantitative tightening and will remain a net seller of Treasuries, while the increase in bond supply due to rising deficit is also driving up the term premium.
Treasury yields pulled back from multi-year highs on Wednesday after the ADP jobs report signaled that the labor market was weakening. Markets will now closely watch Friday’s non-farm payrolls report, as strong data would add fuel to the bond selloff.
“The resilience of the economy and lack of buyers in the bond market means market swings will remain violent,” said Edward Moya, senior market analyst, OANDA.
See how Treasury yields have done across the curve at the Seeking Alpha bond page.
