Treasury Traders Beware Auctions in March as Demand Litmus Test
(Bloomberg) -- Treasuries traders are awaiting three U.S. debt auctions totaling $120 billion in coming days that have the potential to trigger another round of bond selling if demand falters, with reverberations likely felt across the investment universe.
Treasury yields fell across the curve on Tuesday ahead of a sale of $58 billion of three-year notes. The U.S. Treasury will offer $38 billion of 10-year securities the following day and $24 billion of 30-year bonds on Thursday. A further possible catalyst looms on Wednesday in the form of inflation numbers for February, at a time expectations for rising prices have climbed to the highest level since 2014.
“The 10-year and 30-year auctions on Wednesday and Thursday will be closely watched as litmus tests, with weak demand likely adding fuel to bearish sentiment,” TD Securities Inc. rates strategists Gennadiy Goldberg and Priya Misra in New York, wrote in a note to clients published Monday. “Note that the cheapening of 10s -- outright and on the curve — suggests some auction setup.”
Traders have reason to be fearful of the coming supply given poorly bid auctions of five- and seven-year notes last month helped trigger a Treasury slide that pushed benchmark 10-year yields above 1.60% for the first time in a year. The ripples from the manic move higher in rates were felt across asset classes, with equities running into turbulence and debt auctions the world over struggling to find buyers.
“Many market developments, from the rout in extremely speculative stocks to the suddenly crumbling yen and some emerging market currencies, have been triggered by the sharp recent rise in U.S. yields,” said Steen Jakobsen, Chief Investment Officer at Saxo Bank A/S, noting the three-year auction on Tuesday will be less pivotal to overall sentiment than the sales later this week.
“Investors need to watch the U.S. Treasury market for a sense of whether the yield rise and volatility is set to continue or calm for a while,” Jakobsen added.
The rapid repricing of Treasury yields reflects improving expectations for the U.S. economy tied to vaccine rollout and fiscal stimulus. Many say the surge isn’t over yet and predict the 10-year yield will keep climbing to the next threshold of 2%, from a current level of around 1.53%.
BNP Paribas SA is among the banks forecasting the 10-year yield will reach 2% by year-end, but “absolutely there’s a risk that this could happen much quicker,” said Shahid Ladha, head of Group-of-10 rates strategy in New York. “Everything seems to be pointing to a faster pace and bigger magnitude of repricing because the reopening of the U.S. economy and fiscal impulse are surprising to the upside.”
A further increase in yields will probably be led by intermediate maturities, reflecting increased expectations for an earlier start to Fed rate hikes, and flattening the yield curve between the 5-year and the 30-year points, Ladha said.
There are some Treasury positives to be found, too. One is that tighter financial conditions caused by higher yields spark a stock-market selloff and revive demand for U.S. government securities as a haven. Meanwhile, Federal Reserve officials are in their self-imposed quiet period before their next policy decision on March 16-17. Benchmark yields fell on Tuesday after gaining in the last four sessions.
Economists predict Wednesday’s inflation report will show the annual rate climbed to 1.7% last month from 1.4% in January, according to the median estimate in a Bloomberg survey. That would be the highest reading since February 2020.
The U.S. 10-year break-even rate, derived from the difference between the benchmark Treasury yield and its inflation-protected counterpart, is at 2.21% after climbed above 2.26% last month, the highest level since July 2014.
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