From the first week, the market reveals a challenging year ahead for the bond market

Bonds
Althea Spinozzi

Fixed Income Strategist

Summary:  As Democrats seem likely to secure the majority in the US Senate, Treasuries fall with 10-year yields breaking the pivotal 1% level and pointing even higher. Since the beginning of the year, 30-year Treasury yields rose of approximately 15bps resulting in a loss of around 2% for bondholders in only three trading days, revealing that duration will be toxic in 2021. In the meantime, corporates line up to issue debt to secure cheap funding. Although the market is far from a complete meltdown, leverage is rising to levels we haven't seen for almost 20 years, making the market even more sensitive to rising yields.


We have started the new year with the 10-year Breakeven rate breaking above 2%  and reviving the reflation story. Now that Democrats are about to secure the majority in the US Senate, we can only expect more bearish sentiment in Treasuries which will inevitably push yields higher.

Today, the 10-year US Treasury yield has broken above the pivotal 1% level. Suppose a Democratic win in Georgia is confirmed. In that case, yields could continue to rise and break above 1.1% on their way to 1.5% as many have pointed out. Besides these critical levels, I feel it's essential to highlight that the bond market's pain is real and here to stay. 

The US yield curve has been steepening steadily since August until today. Since the beginning of the year, the 5s30s widened by around 10bps. The movement has been concentrated in 30-year Treasuries yields inflicting a loss of about 2% for bondholders in only three trading days.

If 30-year yields close the year with at 2.5% rising about 70bps, the loss that bondholders would face is approximately 15%.

10-year Treasury yield. Source: Bloomberg

Although there are no signs of a market meltdown yet, it's clear that it has arrived the time to reconsider duration, as long-term bonds are most vulnerable to rising yields.

Corporates are also starting to realize that rising yields might pose some obstacles ahead.

In an effort to secure cheap financing, companies are lining up to issue bonds as soon as possible. In only two days, the US investment-grade corporate primary market has seen $40bn in bonds issuance. It is a record if we compare this data with the first two business days of the past five years. This week's corporate bond issuance could easily surpass the one of the past few years reinforcing the notion that rising yields could pose serious refinancing risk for over-leveraged companies.

Although there aren't signs of a market meltdown yet, one cannot ignore that leverage is at the highest level since early 2000, making the market more vulnerable to higher interest rates.

Therefore, it is time to reconsider duration and close those positions that although have provided solid returns in 2020, have become too risky now.

To name a few: iShares 20+ Year Treasury Bond ETF (TLT), Vanguard Long-Term Corporate Bond Index Fund (VCLT), SPDR Portfolio Long Term Treasury ETF (SPTL), Lyxor ETF iBoxx Liquid Corporates Long Dated (COUK).

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.