Tough Year for Treasuries Ends With $131 Billion Auction Blitz

(Bloomberg) -- A last wave of Treasuries issuance for 2018 will test the bond market’s mettle this week, with a partial government shutdown and questions over the fate of Federal Reserve chairman already rattling investors.

Traders gearing up for holiday feasts this week will have even more to digest than usual, with the largest sales of two-, five- and seven-year securities since 2010 book-ending Christmas Day. Add in a floating-rate note reopening, and investors are looking at $131 billion of coupon-bearing debt auctions to close out 2018. U.S. marketable debt outstanding climbed almost $1.1 trillion in the 11 months through November -- the most in six years -- to $15.6 trillion.

While bond bulls have recaptured the momentum in recent weeks amid signs global growth is set to slow and broad-based ructions in financial markets, much of 2018 was a decidedly downbeat year for U.S. government debt overall. The sell-off has been driven in no small part by the increase in supply to fund the widening budget deficit, according to Justin Hoogendoorn, head of fixed-income strategy at Piper Jaffray & Co. Two-year yields have climbed 76 basis points, 10-year yields are up 38 basis points, and the Bloomberg Barclays U.S. Treasury Total Return index has gained just 0.32 percent year-to-date, putting it on track for its worst performance since 2013.

“Until four-to-six weeks ago, it really looked like we were going to have negative returns,” Hoogendoorn said from Chicago. “Higher Treasury issuance played a significant role in pushing rates up, in addition to Fed policy.”

Tough Year for Treasuries Ends With $131 Billion Auction Blitz

Of course that Fed policy -- which has seen the central bank lift its benchmark four times in 2018 -- is likely to continue affecting the bond market, in particular because it has spurred speculation about U.S. President Donald Trump’s stance toward the central bank.

But looking beyond that -- and the issues surrounding the shutdown -- auctions are likely to be the most notable scheduled events in a week that’s otherwise filled with a number of holiday closures and largely devoid of market-moving data.

What to Watch This Week

  • Focus will be on Washington to see if lawmakers can reach and agreement to reopen those parts of the federal government that have been shut down, and also to assess the Trump administration’s stance toward the Fed
  • In terms of scheduled events, Treasury auctions and housing-market data will be the highlights, sandwiched around the Christmas Day holiday. Bond traders also have an early close on Monday to look forward to.
  • Below is the calendar for economic data, although the U.S. government shutdown could postpone the publication of several scheduled releases:
    • Dec. 24: Chicago Fed business index
    • Dec. 26: S&P CoreLogic housing index; Richmond Fed manufacturing index
    • Dec. 27: Jobless claims; FHFA housing price index; Bloomberg consumer comfort; new home sales; Conference Board’s consumer confidence index
    • Dec. 28: Advance goods trade balance; wholesale inventories; Chicago purchasing managers index; pending home sales
  • The Treasury sells notes and bills:
    • Dec. 24: $39 billion of 3-month bills and $36 billion of 6-month bills; $40 billion of 2-year notes
    • Dec. 26: $18 billion of 2-year floating-rate notes; $41 billion of 5-year notes
    • Dec. 27: 4- and 8-week bills; $32 billion of 7-year notes

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