Horrible ghost treasure auction chases the bond market to the brink

Photographer: Samuel Corum / Bloomberg

A battered Treasury market faces another difficult week as it will have to absorb one a massive slate of auctions focused on maturities that have fallen amid a cheerful outlook for growth and inflation.

It’s been a month since a disastrous seven-year auction made the bond market a turning point that impacted financial markets and helped place benchmark yields on the path to pre-pandemic levels. Now, maturity is back on the calendar, with a $ 62 billion offer appearing as a source of anxiety for next week’s retailers.

The government will sell to a market that has endured a painful stretch, pushing for a longer maturity index in a bear market. A key part of the yield curve has just hit its strongest level in more than five years after the Federal Reserve reaffirmed plans to keep rates close to zero until 2023. The seven-year zone, especially vulnerable to shifting speculation on monetary policy, has been beaten as traders bet the central bank will not be able to wait as long. . Since 2015 it has yielded less than the surrounding maturities.

“Supply will be a very important part of next week,” said Justin Lederer, strategist for Cantor Fitzgerald. “We’ll really see what kind of end-user demand comes up in these auctions and whether last month’s seven-year-old was so little sponsored because of that day’s volatility or whether it’s an ongoing issue. Now only there is a lot of volatility and doubts about whether higher rates will affect stocks. “

In February, when investors were already withdrawing from bonds amid stimulus talks and the deployment of vaccines, the government received record demand for the seven-year auction. The added result was fueled by the sale of the Treasury which was extended for a seventh consecutive week.

The auction list highlights another concern. Treasury above all set aside the Fed’s decision on Friday to expire the banking regulatory exemptions that have driven the bond market since the start of the pandemic. But dealers have been Unloading the Treasury, and for some analysts, the Fed’s measure runs the risk of stressing around auctions.

Pain of long maturity

The fall in fixed income has hit the longest maturities hardest. As of Thursday, a Bloomberg Barclays U.S. Treasury index that tracks debt maturing for ten years or more fell about 22% from its March 2020 high, placing it in bearish territory, at least for this value. The ten-year yield touched 1.75% this week, the highest since January 2020.

The Treasury bond market, which began in 1981, has finally ended

Yields and inflation expectations also took off after Fed Chairman Jerome Powell pushed back any need to combat the rise. A market proxy for inflation over the next decade rose to 2.3% this week, the highest since 2013.

Powell he reiterated this week that he would only see a problem with bond sales if it were accompanied by “disorderly market conditions or a persistent tightening of financial conditions that threaten the achievement of our goals.” Technology stocks appeared to suffer points last week as yields rose sharply.

This causes traders to monitor a large number of Fed speakers ahead, especially Powell, to gain new insights. A continued message of patience about adjustment rates could cause some to bet that the hikes could come before Fed plans.