Bond bulls who enjoyed a rare rally in short-term Treasuries last week might not want to get too comfortable: the world’s biggest debt market is about to be inundated with an unprecedented wave of issuance.
The US Treasury will probably auction about $294 billion of bills and notes this week, its largest slate of supply ever. The $30bn two-year note sale is the biggest since 2014, and comes as the maturity posted just its fourth weekly gain in the last six months. The three and six-month bill offerings remain at record sizes.
It’s a pivotal moment for traders gauging a Treasury market that appears to be range-bound after yields set multi-year highs in recent weeks. Jerome Powell’s first meeting as Federal Reserve chairman largely signalled continuity with Janet Yellen’s gradual path. That makes the market’s reception of swelling US issuance a key to determining whether the bond selloff will resume.
“These larger auctions are more difficult to digest,” said Thomas Simons, a money-market economist at Jefferies. “But the auctions do OK when they have a concession. It’s even more necessary than it was in the past.”
While there’s evidence of weakening demand for US auctions, an analysis of trading data is mixed at best about whether that portends further losses in Treasuries. But the threat of diminished interest and higher yields comes at a precarious time, with budget deficits climbing and the Fed paring its balance sheet.
US financing needs are growing partly as a result of the tax overhaul. The Treasury is ramping up sales of shorter-term debt, like the maturities to be issued this week, while longer-dated obligations are growing at a slower pace.
The $35bn of five-year notes and $29bn of seven-year debt each match the largest offerings of the maturities since January 2016. In contrast to auctions in recent months, however, this week’s batch comes as the selloff has stalled.
The five-year sale last month yielded 2.658 per cent and the seven-year 2.839 per cent. The yields ended Friday at 2.6 per cent and 2.74 per cent, respectively. If the five-year sale yields less than in February’s auction, it would mark the first drop since August.
Of course, traders may build in a concession to take down the issuance, pushing yields at auction above their multi-year highs.
The results may help investors figure out whether last week’s rally was an aberration in a market otherwise dominated by rising short-term yields and a flattening curve.