Stampede Into Treasuries Sets Up Auctions at Record Low Rates
Flight-to-safety in the world’s largest bond market will take on new meaning this week, as the coronavirus spreads.
(Bloomberg) -- Flight-to-safety in the world’s largest bond market will take on new meaning this week, with some Wall Street firms considering contingency plans for the spread of the coronavirus.
While traders await updates on their working arrangements, there may be little standing in the way of the haven trade that drove the U.S. 10-year yield down to an unprecedented 0.66% Friday amid an equities rout. The market will be watching for further liquidity strains in Treasury futures, and how that might translate into demand for more haven assets at this week’s Treasury auctions. Over the weekend, Saudi Arabia declared an all-out price war in the oil market, adding to the wall of worries over a looming recession and signs of strain in credit markets that have driven investors to the safety of Treasuries.
The Treasury is poised to sell a combined $78 billion of coupon securities at historically low yields. Wednesday brings $24 billion of 10-year notes. To get a sense of the ferocity of the bond rally in recent days as fear over the virus’s impact intensified, the last auction of this maturity, on Feb. 12, drew a yield of 1.62%.
“Given those moves we’re seeing in the 10-year, that implies to me there’s a lack of inventory out there and you’ve got to think the auctions will go well,” said Lee Ferridge, a macro strategist at State Street Corp. “The risk from here has to be that things get worse before they start getting better.”
He’s now looking for the 10-year yield to head toward 0.5%, from a closing level of 0.76% last week.
Relentless demand has taken the maturity’s price to lofty levels going into this week’s auction. The current 10-year carries a higher price than any reopening since 2009.
Friday’s market moves have already drawn comparisons with the financial crisis, though with less confidence that policy makers can do much to combat the economic impact of the disease.
Markets barely registered last week’s pledge from the Group-of-Seven that it was ready to act, and the emergency rate cut from the Federal Reserve. As for the robust U.S. jobs report, Columbia Threadneedle strategist Ed Al-Hussainy dismissed it as “roadkill for this rates market.”
The underwhelmed market reaction to the Fed demonstrated the difficult task facing European Central Bank Governor Christine LaGarde on Thursday. Economists are split on whether the bank will unleash monetary stimulus at this meeting, and hopes are building instead for some fiscal response.
In the meantime, market participants are fixated on what sort of liquidity conditions will greet them in what promises to be another turbulent week.
“Markets are functioning, but it seems to me that on a day when the 10-year yield is lower by 20 basis points, that’s not orderly, that’s a gap,” said Mike Schumacher, head of rates strategy at Wells Fargo Securities, referring to the most extreme levels in Friday’s trading.
“I wish I had more answers,” he said. “We all do.”
What to Watch
- Fed officials are in a blackout period ahead of the March 17-18 meeting, but markets will be fixated on the message from the ECB on Thursday.
- The New York Fed will release new schedules on March 12 for its Treasury purchases and repo operations
- Here’s the economic calendar:
- March 10: NFIB small business optimism
- March 11: MBA mortgage applications; consumer price index; real average earnings; monthly budget statement
- March 12: Producer price index; jobless claims; Bloomberg consumer comfort; household change in net worth
- March 13: Import/export prices; Bloomberg U.S. economic survey; University of Michigan sentiment
- The auction slate is busy:
- March 9: $42 billion of 13-week bills; $36 billion of 26-week bills
- March 10: $38 billion of 3-year notes
- March 11: $24 billion of 10-year notes reopening
- March 12: 4-, 8-week bills; $16 billion of 30-year bonds reopening
--With assistance from Elizabeth Stanton and Alexandra Harris.
To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum
©2020 Bloomberg L.P.