Demand for Treasuries continues as the U.S. government floods the market with more than $180 billion in new debt this week, highlighting the appeal of high yields on short-dated bonds.
Investors soaked up a $70 billion sale of five-year Treasuries on Wednesday at slightly above-expected yields after an auction of two-year notes on Tuesday sparked even more demand. Profitability securities on the secondary market changed little and amounted to 4.65% at the beginning of the trading session in Europe.
Another $44 billion issue is due to be offered on Thursday, when seven-year bonds go on sale. While demand has been robust, investors may be less receptive to buying securities with longer maturities in the days before the Treasury delivers its quarterly refund announcement and the Federal Reserve meets.
“Despite higher yield levels with nominal GDP in the 5% range, the environment for increasing duration remains uncertain,” said Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities. “Ultimately, the Fed’s changed stance, increased volatility and increased Treasury funding needs will lead to more challenging conditions for auctions at longer ends of the curve.”
US bond yields are tempting buyers near recent peaks. 2-year US bond yield, 5-year US bond yield. Source: Bloomberg
This week’s strong supply – the latest in the current funding cycle – is expected to help determine whether this marks a turning point for a market that has endured four straight weeks of losses. The selloff briefly pushed two-year yields above 5%, a level some see as attractive to bond managers looking to invest money with short maturities.
Traders are reducing the number of expected rate cuts by the Federal Reserve and abandoning bullish bets. The driving force was a string of robust economic data and evidence that inflation will remain high for a long time, exacerbating the threat of the government’s excessive borrowing needs.
Wall Street closely watched the five-year bond auction as investors seeking longer maturities focused their bets on the shorter end of the curve, which is most sensitive to changes in monetary policy expectations.
Bank of America Corp strategists including Mark Cabana earlier this month recommended long five-year Treasuries, saying the term “captures the low end of the Fed’s rate cut and is not as susceptible to heightened supply concerns” compared with longer maturities.
However, Treasuries were mostly weaker on Wednesday, helping the market absorb the five-year issue. Bond dealers who acted as underwriters for the auction were left with 15% of the securities, which is below the recent average.
“The only noteworthy aspect for me remains the large volume of auctions that took place,” said George Catrambone, head of fixed income at DWS Americas. “The remainder was small.”
Investors are eyeing Thursday’s GDP data and an important inflation reading later in the week, which could help shape expectations about the Fed’s monetary policy stance.
American politicians will meet next week and announce an updated policy statement. Investors will also be watching the next release of employment data for more clarity on the economy and policy moving forward.
Prepared by ProFinance.Ru based on Bloomberg materials
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