(Bloomberg) – A battered Treasury bond market faces another difficult week, as it will have to absorb a huge list of auctions focused on maturities that have been reached amid an optimistic outlook for growth and inflation.
It’s been a month since a disastrous seven-year auction put the bond market into a steep drop that reverberated in the financial markets and helped put benchmark yields on the road to pre-pandemic levels. Now that due date is on the calendar again, with a $ 62 billion offer appearing as a source of anxiety for resellers next week.
The government will be selling in a market that has gone through a painful period, bringing a longer maturity index to a bear market. An important part of the yield curve reached its highest point in more than five years after the Federal Reserve reaffirmed plans to keep rates close to zero until 2023. The seven-year area, which is especially vulnerable to changes in speculation in monetary policy , took a beating as traders bet that the central bank will not be able to wait that long. Its performance around earnings is worse since 2015.
“Supply will be a very important part of next week,” said Justin Lederer, strategist at Cantor Fitzgerald. “We’ll really see what kind of end-user demand comes up at these auctions, and whether the past seven-year month was so badly sponsored because of that day’s volatility or whether it’s an ongoing topic. There is a lot of volatility now and doubts about whether higher rates will impact stocks ”.
In February, when investors were already withdrawing from the bonds amid stimulus talks and the launch of the vaccine, the government received a record low demand for the seven-year auction. The added result fueled a liquidation of Treasury bills that spanned the seventh consecutive week.
The auction screen highlights another concern. Treasury bonds ignored the Fed’s decision on Friday to let banks’ regulatory exemptions that have boosted the bond market since the start of the pandemic lapse. But traders have been getting rid of Treasury bills, and for some analysts, the Fed’s action could add to the stress around auctions.
Long-term pain
The fall in fixed income affected the longer maturity terms more strongly. On Thursday, a Bloomberg Barclays US Treasury index that tracks debt 10 years or older to maturity fell about 22% from its March 2020 peak, placing it in bearish territory – at least for this one. indicator. The 10-year yield reached 1.75% this week, the highest since January 2020.
Yields and inflation expectations also skyrocketed after Fed Chairman Jerome Powell backed off on any need to fight the increase. A market proxy for inflation over the next decade has risen to about 2.3% this week, the highest since 2013.
Powell reiterated this week that he would only see a problem with bond sales if it was accompanied by “disorderly market conditions or the persistent tightening of financial conditions that threaten the achievement of our goals”. Technology stocks appeared to have suffered a few points in the past week, as yields soared.
This leaves traders monitoring a series of Fed speakers ahead, especially Powell, in search of new insights. A continued message of patience about tightening rates could cause some to step out of the bets that increases could come before Fed projects.
“I suspect Fedspeak will remain in line with Powell’s views this week, that they are letting inflation rise a little and are unlikely to change rates or decrease asset purchases” for a long time, said Tom di Galoma, manager director of government strategy and trade at Seaport Global.
He expects 10-year yields to rise to about 1.9% -1.95% in mid-year, and he sees room for 2.25%, depending on the composition and size of any additional stimulus proposals.
What to watch
The economic calendar:
March 22: Chicago Fed national activity index; sale of existing homes March 23: Current account balance; new home sales; Richmond Fed Manufacturing Index, March 24: MBA mortgage applications; durable / capital goods orders; Markit PMIs March 25: Unemployment claims; GDP; Langer consumer comfort; Kansas City Fed Manufacturing March 26: Advanced goods balance of trade; wholesale / retail stocks; personal income / expenses; PCE deflator; University of Michigan feeling
The Fed’s calendar:
March 21: Thomas Barkin of the Richmond Fed at the Credit Suisse Asian Investment Conference March 22: Powell on the BIS panel; Barkin; Mary Daly, of the San Francisco Fed; Vice President of Supervision Randal Quarles on the Libor transition; Governor Michelle Bowman March 23: James Bullard of the St. Louis Fed; Raphael Bostic of the Atlanta Fed; Barkin; Powell and Treasury Secretary Janet Yellen, before the House committee; Governor Lael Brainard in two appearances; New York Fed John Williams March 24: Barkin; Powell and Yellen before the Senate committee; Williams; Daly; Charles Evans of the Chicago Fed, March 25: Williams; Clarida; Bostic; Evans; Daly
The auction schedule:
March 22: accounts for 13, 26 weeks; March 23: 52-week bills; 42-day cash management invoices; 2-year notes March 24: 2-year floating rate notes; 5-year notes March 25: bills of 4 to 8 weeks; 7-year notes
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