Traders work on the floor of the New York Stock Exchange.
NYSE
Stock traders don’t normally talk about bond auctions, but all this week the 10-year Treasury auction on Wednesday has been the main topic of conversation.
“It’s been a long time since stock traders haven’t cared about bond auctions,” Matt Maley of Miller Tabak told me. “The number one issue in the stock market is now bond yields.”
This belief is widespread on the street: with the history of reopening now having a high share price, interest rates are the marginal engine of markets.
Panic could be felt among stock market traders, as the ten-year yield went from 1.1% to 1.5% in less than two weeks at the end of February, which led to the closure of technological stocks. Some bond watchers predicted that yields could move up to 2%.
If new concentrations of securities depend on rates, have they reached their peak? The ten-year Treasury has taken several races to explode more than 1.6% and has failed. This is giving some investors hope that the finish is over.
Much depends on the outcome of Wednesday’s 10-year auction at 1 p.m. ET. Some stockbrokers believe demand will be strong, especially from foreign buyers like the Japanese, with a ten-year yield of 0.1%.
Guy Lebas, chief fixed income strategist at Janney Capital Markets, said U.S. foreign demand for treasury will remain and remain strong.
“What matters is the pace of increases rather than actual returns,” he told me. “We had a fairly rapid rise in yields in late February and early March, and that caused a lot of indigestion. When prices go down as they have, there is more demand intervening and slowing down the process.”
This includes foreign buyers.
“A large portion of U.S. Treasuries are owned by overseas entities, which is about 40 percent of all outstanding Treasures,” he told me. “Many of these buyers hedge the exchange rate risk, so what interests them is the return after hedging. Right now you get 1.5% in 10 years and you get 20 basis points in currency hedging, so it’s 1.7%. That’s a very attractive return for foreign buyers. There’s no place in the world that can get 1.7% based on its monetary coverage. “
This is music for the ears of stock market traders, who also hope that one of the main concerns about rising bond yields, inflation, will also set in quickly.
“Any price increase we’re seeing for commodities is because of the accumulated demand and because the supply chain is stressed,” Alec Young, investment director at Tactical Alpha, told me. “But every time the balance is put online, you will see prices fall again. Price increases are due to reopening, not long-term inflation, and the bond market has reacted excessively.”
Still, even Young believes the ten-year auction will be the main engine in the market. “A lot of traders are likely to sit on their hands until the auction,” Maley told me.
What if the auction keeps rates close to the 1.5% level? This, for Alec Young, will be a sign that it is much safer to return to technology.
“Investors want to have technology,” he told me. “There’s no deep loyalty to most of the names that reopen. No one wants to ignore Carnival Cruise Lines, or United Airlines, or even Chevron. They want technology.”