Vindicated Bond Bears Pin Hopes on Treasury Auctions, Stimulus

Bond bears appear to have momentum on their side -- for the moment, at least.

Ten-year Treasury yields enter next week with an upward tailwind after nearly hitting 1% on Friday as tepid job creation lifted hopes for more government spending as virus cases mount. Additional progress toward fiscal stimulus coupled with investors absorbing $118 billion of Treasury note and bond auctions -- almost a weekly record -- could help the benchmark yield crack the top of the range that’s held since late March.

“Supply and the expectation that the lame duck session of Congress will deliver some down payment on even more fiscal stimulus to come beyond that is pressuring yields,” said Mark Spindel, chief investment officer for the District of Columbia Retirement Board, which manages retirement assets of several public unions in the region. “The bond market is hyper-focused on the possibility of a fiscal package.”

Vindicated Bond Bears Pin Hopes on Treasury Auctions, Stimulus

House Speaker Nancy Pelosi on Friday said there’s momentum building toward a compromise stimulus plan. She and Senate Majority Leader Mitch McConnell have discussed attaching the relief measures to an omnibus spending bill that the parties are working on separately to keep the government funded into 2021.

On top of that, the market may face yield-boosting indigestion from the large plate of auctions being served by the Treasury Department next week. Tuesday’s sale of $56 billion in 3-year notes will be followed Wednesday by a $38 billion auction of 10-year notes and a $24 billion sale of 30-year bonds on Thursday.

And hopes that inflation will rebound have been rekindled the past few days, driving bond-based measures of inflation expectations up to the highest level in a year and a half. So next week’s reading on consumer prices for November will be keenly watched.

The 10-year yield has moved between around 0.50% -- a trough reached in August -- and just under 1% since March 23. It has risen two straight weeks, reducing this year’s return for Treasuries to 7.7% as of Dec. 3, according to Bloomberg Barclays index data.

“Should Democrats and Republicans reach an early deal on fiscal stimulus this side of the inauguration of President-elect Biden, we could see an earlier transition into the higher rate path” than we currently are forecasting, Ralf Preusser, global head of rates strategy at Bank of America Corp., wrote in a note. The firm presently forecasts the 10-year yield will end 2020 at 0.90% and move to 1.5% by a year later.

What to Watch

  • Economic calendar:

    • Dec. 7: Consumer credit
    • Dec. 8: NFIB small business optimism; nonfarm productivity; unit labor costs
    • Dec. 9: MBA mortgage applications; wholesale trade sales & inventories; JOLTS job openings
    • Dec. 10: CPI; jobless claims; Bloomberg consumer comfort; household change in net worth; monthly budget statement
    • Dec. 11: PPI; University of Michigan sentiment
  • Fed calendar:
    • Dec. 11: Fed Vice Chair for Supervision Randal Quarles
  • Treasury auction calendar:

    • Dec. 7: 13-, 26-week bills
    • Dec. 8: 3-year notes
    • Dec. 9: 10-year notes reopening
    • Dec. 10: 4-, 8-week bills; 30-year bonds reopening

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