The ghost of the horrible treasure auction haunts the bond market on the brink


Photographer: Samuel Corum / Bloomberg

A battered Treasury market faces another difficult week as it will have to absorb a massive list of maturity-focused auctions that have been hit amid an optimistic outlook for growth and inflation.

It has been a month since a The disastrous seven-year auction sent the bond market into a tailspin that impacted all financial markets and helped set benchmark yields on the path to pre-pandemic heights. Now that maturity is on the calendar again, with a $ 62 billion offering looming as a source of anxiety for distributors in the coming week.

The government will sell in a market that has endured a painful stretch, driving a longer maturity rate. in a bear market. A key part of the yield curve has just reached its steepest point in more than five years after the Federal Reserve it reaffirmed plans to keep rates close to zero until 2023. The seven-year area, especially vulnerable to changing speculation on monetary policy, has taken a beating as traders bet the central bank won’t be able to wait that long. It is the worst performance of the surrounding maturities since 2015.

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“Supply will be a very important part of next week,” said Justin Lederer, a strategist at Cantor Fitzgerald. “We will really see what kind of end-user demand comes up in these auctions, and if the past seven-year month was so poorly sponsored due to the volatility of that day or if it’s an ongoing theme. Now there is a lot of volatility and there are questions about whether the higher rates will affect stocks. “

In February, as investors were already turning away from bonds amidst stimulus talks and the launch of the vaccine, the government received record demand for the seven-year auction. The aggregate result fueled a Treasury sell-off that spanned a seventh week in a row.

The auction list highlights another concern. Treasury bonds mostly it ignored the Fed’s decision on Friday to let the banking regulatory exemptions that have boosted the bond market lapse since the start of the pandemic. But the dealers have been unload Treasuries and, for some analysts, the Fed’s move runs the risk of creating stress around auctions.

Prolonged maturity pain

The recession in fixed income has hit longer maturities the hardest. As of Thursday, a Bloomberg Barclays US Treasury index that tracks debt 10 years or more to maturity was down about 22% from its March 2020 high, putting it in bearish territory, at least by this indicator. The 10-year yield touched 1.75% this week, the highest since January 2020.

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Yields and inflation expectations also soared after Fed Chairman Jerome Powell rejected any need to combat the increase. A market approximation for inflation over the next decade rose to around 2.3% this week, the highest since 2013.

Powell He reiterated this week that he would only see a problem with the bond liquidation if it were accompanied by “disorderly conditions in the markets or a persistent tightening of financial conditions that threaten the achievement of our goals.” Tech stocks appeared to suffer at some points last week as yields extended their rally.

That leaves traders monitoring a slew of Fed speakers, especially Powell, for new insights. A continued message of patience on rate tightening could cause some to take off the bets that the hikes may come sooner than the Fed projects.

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