US Treasuries Face Worst Month as Selloff Drives Yields Higher and Triggers More Selling

10-Year Yield Jumps 0.5 Percentage Point Last Month

Short- and Mid-Term Bonds May Offer a Buy-the-Dip Opportunity

A sharp rise in the yield on the 10-year US Treasury note last month, which translates into a steep drop in bond prices, is fueling another vicious cycle of Treasury selling. What began with inflation concerns and the possibility of higher policy rates is now triggering additional sales by financial firms trying to limit losses.

The yield on the 10-year US Treasury surged more than 0.5 percentage point in September to 5.3%, the highest level since 2007, the Financial Times reported on October 1. That marked the biggest monthly increase since 2022. The FT said moves of that magnitude are unusual for US Treasuries, which serve as a benchmark for global financial markets.

Since mid-September, Treasury selling by financial firms trying to cut losses has also been blamed for pushing yields even higher. Matthew Scott, head of global trading at AllianceBernstein, said hedge funds and real estate investment trusts were among the major investors recently forced to dump long-dated US Treasuries. Priya Misra, a portfolio manager at JPMorgan, questioned what could stop the trend and said the pattern could continue for some time.

Selling was especially heavy among financial firms with large holdings of mortgage-backed securities, or MBS. When market interest rates rise, borrowers have less incentive to repay mortgages early, lengthening the time it takes for MBS investors to recover principal. That leaves bondholders more exposed to interest-rate swings, prompting them to sell other long-term debt such as US Treasuries to reduce risk. Similar moves are unfolding in other parts of the market as well, including leveraged funds with large positions in US Treasury futures that are rebalancing portfolios, Barclays analyst Amrut Nashikkar said.

Some investors also view the surge in Treasury yields as a buying opportunity. With bond prices having fallen sharply, new investors can expect higher returns than before.

Another point drawing attention is that bonds are starting to function again as a traditional diversification tool. Ritholtz Group expects stock and bond prices this year to move in opposite directions for the first time since 2021. The Wall Street Journal said the traditional 60/40 portfolio split — 60% stocks and 40% bonds — may finally work again by reducing volatility when gains in one asset class offset declines in the other.

Money is already flowing into the bond market. Morningstar said inflows into bond funds through September have exceeded the annual totals recorded in each year since 2021.

Still, inflation concerns could keep long-term yields rising. That means investors may be better off increasing exposure to short- and medium-term bonds, which are relatively less sensitive to rate swings, rather than long-term debt. Colin Martin, head of the Schwab Center for Financial Research, added that spreading investments across bonds with different maturities is another way to diversify interest-rate risk.

Han Myung-hyun, Hankyung.com reporter wise@hankyung.com