As the U.S. government-debt futures market reflects increased demand in the wake of the recent attack by Hamas on Israel, there is a possibility that Treasury yields may decrease when the cash market reopens on Tuesday.
According to FactSet data, the price of 10-year Treasury note futures TY00, +0.78% started to rise approximately 90 minutes prior to the opening of the U.S. stock market on Monday. Additionally, it surpassed its recent moving averages. Notably, the $25 trillion Treasury market remained closed on Monday due to Columbus Day and Indigenous Peoples Day.
Similarly, demand for 30-year Treasury bond futures US00, +0.85% also experienced a surge on Monday.
The ongoing conflict in the Middle East, characterized by Israel’s powerful attacks on Gaza, has prompted a risk-off atmosphere in financial markets. In the first 90 minutes of trading, all three major U.S. stock indexes DJIA SPX COMP recorded modest declines.
Potential Reversal of “Short the Bond Market” Sentiment
Tom Lee, head of research at Fundstrat, suggests that a rally in government debt could reverse the prevailing “short the bond market” sentiment that has caused yields to reach multiyear highs. Fundstrat anticipates a significant decline in the 10-year yield BX:TMUBMUSD10Y, which reached a 16-year high of 4.801% on October 3.
Moreover, there are speculations about the potential positive impact of the attack on Israel on equities. Tom Lee provides insights into why this event could benefit stocks.
The heightened geopolitical risk arising from the conflict has driven investors towards safe-haven assets such as gold, the dollar, and Treasurys-linked exchange-traded funds. The iShares 20 Plus Year Treasury Bond ETF TLT saw a 1% increase in Monday morning trading. Simultaneously, the ICE U.S. Dollar Index rose by as much as 0.5%, while gold experienced a rally.
Chief Investment Officer David Donabedian from CIBC Private Wealth U.S. in Atlanta comments on the market reaction to the Israel/Hamas conflict. He believes that the response observed in the U.S. financial market, including the strong demand for Treasuries and the strength of the dollar, is rational and measured. While these reactions may seem knee jerk, Donabedian does not perceive any signs of panic yet.