The Ghost of Horrible Treasury auction haunts the bond market on Brink

Photographer: Samuel Corum / Bloomberg

A beaten Treasury market is facing another difficult week as it will have to absorb a a massive list of maturity-focused auctions that have collapsed amid a bright outlook for growth and inflation.

It’s been a month since a disastrous seven-year auction brought the bond market to a turning point in financial markets and helped place benchmark yields on pre-pandemic heights. Now, that deadline is back on the calendar, with a $ 62 billion offer appearing as a source of anxiety for dealers next week.

The government will sell in a market that has endured a painful stretch, leading to an index of longer maturities in a bear market. An essential part of the yield curve has reached the steepest in the last five years after the Federal Reserve reaffirmed plans to keep rates close to zero by 2023. The seven-year zone, particularly vulnerable to shifting speculation on monetary policy, has taken a beating as traders have bet the central bank will not be able to wait that long. Starting with 2015, the surrounding maturities decrease the most.

“Procurement 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 appears in these auctions and whether last month for seven years was so poorly sponsored due to the volatility of that day or if it is a continuing theme. There is only a lot of volatility now and questions about whether higher rates will impact stocks. ”

In February, when investors were already moving away from bonds amid stimulus talks and the launch of the vaccine, the government received record application for the seven-year auction. The added result was fueled by a Treasury sale, extended to a seventh consecutive week.

The tender plan highlights another concern. Treasurers especially on Friday dropped the Fed’s decision to drop the banking regulatory exemptions that have favored the bond market since the beginning of the pandemic. But the dealers were Treasury discharge, and for some analysts, the Fed’s move risks increasing the stress around auctions.

Long-lasting pain

The decrease in fixed income most affected the longer maturities. As of Thursday, a U.S. Treasury Bloomberg Barclays index, which tracks debt by 10 years or more to maturity, has fallen about 22 percent from its March 2020 peak, placing it in bear territory – at least with this The 10-year yield level reached 1.75% this week, the highest since January 2020.

The Treasury Bull Market, which began in 1981, has finally closed

Inflationary yields and expectations also picked up after Fed Chairman Jerome Powell rejected any need to fight growth. A market share for inflation over the next decade has risen to around 2.3% this week, the highest since 2013.

Powell reiterated this week that it will see a bond sale only if it is accompanied by “disorderly market conditions or the persistent tightening of financial conditions that threaten to achieve our targets”. Technical stocks seem to be suffering at some points last week as yields have expanded.

This allows traders to monitor a number of Fed speakers, especially Powell, for new information. A constant message of patience about tightening rates could cause some to abandon bets that increases could come earlier than Fed projects.