Ghost of Ghastly Treasury auction haunts the bond market on Brink

Photographer: Samuel Corum / Bloomberg

A battered government bond market faces another tough week as it is a huge slate of auctions targeting maturities confused by a brighter outlook for growth and inflation.

It’s been a month since a a catastrophic seven-year auction sent the bond market into a tailspin that bounced off financial markets and propelled benchmark returns to pre-pandemic highs. Now that maturity is back on the calendar, with a $ 62 billion offering looming as a source of concern for dealers in the coming week.

The government will sell in a market that has been through a painful period, with an index of longer maturities in a bear market. Much of the yield curve has just hit its steepest point in more than five years after the Federal Reserve confirmed plans to keep interest rates around zero through 2023. The seven-year area, which is particularly vulnerable to changing monetary policy speculation, has taken a beating as traders bet the central bank won’t be able to wait that long. It has underperformed the surrounding maturities the most since 2015.

“Replenishment will be a very important part next week,” said Justin Lederer, a strategist at Cantor Fitzgerald. “We will really see what kind of end-user demand appears in these auctions, and whether the past seven years have been so poorly sponsored due to the volatility of the day or whether it is an ongoing theme. There is just a lot of volatility right now and there are questions as to whether higher interest rates will affect stocks. “

In February, as investors already pulled out of bonds amid stimulus talks and vaccine rollouts, the government received record-low demand for the seven-year auction. The result contributed to a government bond sell-off that was extended to a seventh straight week.

The auction slate highlights yet another concern. Usually treasure chests shook off the Fed’s decision on Friday to drop legal exemptions from banks that have supported the bond market since the start of the pandemic. But dealers have been government bonds offload, and for some analysts, the Fed’s move threatens to add stress around auctions.

Long-term pain

The fixed-income malaise has hit longer maturities hardest. As of Thursday, a Bloomberg Barclays US Treasury index that tracks debt 10 years or more to maturity is down about 22% from its March 2020 peak, pushing it into bear territory – at least by this gauge. The 10-year yield hit 1.75% this week, the highest level since January 2020.

Treasuries Bull Market that started in 1981 has finally ended

Returns and inflation expectations also soared after Fed Chairman Jerome Powell reversed the need to fight the rise. A market indicator for inflation over the next decade rose to about 2.3% this week, the highest level since 2013.

Powell reiterated this week that he would only see a problem with bond sell-offs if it was accompanied by “disorderly market conditions or persistent tightening of financial conditions that jeopardize the achievement of our targets”. Tech stocks seemed to suffer in certain areas over the past week as yields extended their gains.

That allows traders to keep an eye on a whole host of Fed speakers, especially Powell, for new insights. A persistent message of patience over tariff tightening could prompt some to stop betting that the increases would come before the Fed projects.