Bonds’ best month since March faces ‘sanity check’ at auction

(Bloomberg) — The U.S. Treasury market’s nascent rebound is facing its next big test: bond auctions that will help gauge whether investors are confident that the 2023 sell-off is over once and for all.

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Spurred by signs of slowing inflation and slowing economic growth, traders and investors have recently plunged into U.S. government debt, believing the Federal Reserve has finished raising interest rates and will turn to cutting rates by the middle of next year. The situation ended in June with a month-long decline in U.S. Treasuries, pushing the market up 2.6% in November. It was the biggest gain since March, when concerns were raised that a banking crisis would bring down the economy.

But this month’s gains have pushed yields to their lowest levels since September, turning demand at Monday’s 20-year Treasury auction into an indicator of whether investors see a risk that the recent trend will reverse. Such concerns were evident in the 30-year Treasury auction earlier this month, when the market briefly fell after the Treasury Department had to offer an unusually large yield premium to sell the securities.

The U.S. Treasury’s 20-year bond has been a heavy liability for most of its three-year existence, during which time it was never sold during the holiday-shortened U.S. Thanksgiving week. A strong reaction would therefore be particularly strong support for a rebound.

William Marshall, head of U.S. rates strategy at BNP Paribas, said the sale “would be a good sanity check on the notion that the evolution of data has shifted in a meaningful way toward a more stable/constructive way of absorbing long-term Period supply”. .

Trader confidence has taken a hit over the past year as an unexpectedly strong economy and stubborn inflation suppressed several rallies that erupted on speculation the Fed would stop raising interest rates. The ballooning federal deficit is testing the market’s ability to absorb all the money. The new debt to finance it also played a role.

But signs this month that the labor market has cooled and inflation is under control have boosted confidence that the central bank’s monetary policy will be tightening enough. Meanwhile, the Treasury Department announced a smaller increase in auction sizes than many bond traders had expected, particularly for longer-dated products, easing some supply-side concerns.

Nonetheless, yields at the 30-year bond auction on November 9 were much higher than expected, indicating weak demand, leading to a sharp market sell-off that day. However, the downturn proved short-lived, resulting in new returns for investors. Bonds continued to rise, with yields falling to 4.56% on Friday from a starting level of about 4.77%.

While the 20-year note has been suffering from weaker demand – with higher yields than the 30-year note – Marshall said the 20-year note has been better at auctions since the Treasury cut its size relative to the 10-year and 30-year notes. Performance in has been better. Monday’s auction fetched $16 billion, compared with $24 billion at this month’s 30-year auction.

Even so, the 20-year note has failed to keep pace with recent gains in the U.S. Treasury market, a sign of awareness that next week’s auction may be difficult to conduct.

“People know there may be a volume and liquidity vacuum next week,” but “you can imagine the market trying to make room for it,” said William O’Donnell, rates desk strategist at Citigroup stated at the time of this auction.

“I don’t think supply is going to be as severe of an issue as the market might be worried about right now,” he said. “We may feel undersupplied at times.” That was the case on Tuesday, when October’s consumer price index triggered a rebound in five years. Treasury bond yields fell 25 basis points.

What do Bloomberg strategists say?

U.S. Treasuries are expected to achieve double-digit returns in 2024, given that Bloomberg Economics believes that 2024 will begin with a recession followed by a modest recovery. With monetary policy easing and lower inflation expected, demand for U.S. Treasuries is likely to overwhelm supply, and the federal deficit will continue to be a problem.

—Ira Jersey and Will Hoffman, interest rate strategists

Click here to view the full report

Key U.S. economic indicators for the week ahead include October durable goods orders. Globally, UK and Eurozone PMIs will also be released.

Of course, concerns remain. This week’s decline in yields is partly attributable to the latest plunge in oil prices, while gains in U.S. Treasuries also ran out of steam on Friday as oil prices rebounded from their lowest levels since July.

Additionally, traders may be over exaggerating as they continue to expect the Fed to cut rates by June and a total of four rate cuts by December 2024. Fed officials themselves do not expect more than one interest rate cut in September. based on their median forecast.

Leslie Falconio, head of taxable fixed income strategy at UBS, said: “The risk is that yields will move higher as the market prices in easing policy, as we have seen before, especially That’s if the Fed adopts more cautious rhetoric at its December meeting.” Global Wealth Management.

what to see

  • Economic Data Calendar

    • November 20: Leading Index

    • November 21: Chicago Fed National Activity Index, Philadelphia Fed Non-Manufacturing; Existing Home Sales

    • Nov. 22: MBA mortgage applications; first-time unemployment claims; durable goods

    • November 23: University of Michigan sentiment interpretation;

  • Fed calendar:

  • Auction Calendar:

    • November 20: 13-week and 26-week notes; 20-year bond

    • November 21: 2-year FRN reopens; 41-day CMB; 10-year TIPS reopens

    • November 22: 4th, 8th and 17th week bills

——With assistance from Ye Xie and Edward Bolingbroke.

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