Traders are working on the floor of the New York Stock Exchange.
NYSE
Fellows do not normally talk about bond auctions, but all week, the 10-year Treasury auction on Wednesday was the main topic of conversation.
“It’s been a long time since stockbrokers don’t care about bond auctions,” Matt Maley of Miller Tabak told me. “The number one issue for the stock market is now bond yields.”
This belief is widespread on the street: with the story of reopening, now largely valued in shares, interest rates are the marginal factor of markets.
You may feel panic among stock traders as the 10-year yield moved from 1.1% to 1.5% in less than two weeks at the end of February, causing technology stocks to shrink. Some bond watchers have predicted that yields could reach 2%.
If other stock rallies depend on installments, have they reached their climax? The 10-year treasury made several trips to the outbreak of over 1.6% and failed. This gives some investors hope that the completion will be completed.
Much depends on the outcome of the 10-year auction on Wednesday at 13:00 ET. Some stock market bulls believe demand will be strong, especially from overseas buyers such as the Japanese, whose 10-year yield is 0.1%.
Guy Lebas, chief fixed income strategist at Janney Capital Markets, said external demand for the US Treasury has remained and will remain strong.
“What matters is the pace of growth rather than real yields,” he told me. “We had a fairly rapid rise in yields in late February and early March, which caused a lot of indigestion. When prices fall as they did, demand increases and the process slows down.”
This also includes foreign buyers.
“A large part of the US Treasury is owned by overseas entities, representing about 40% of the total outstanding Treasury,” he told me. “Many of these buyers hedge currency risk, so they care about the post-hedge yield. Right now you get 1.5% over 10 years and you get 20 basis points on the currency hedge, so it’s 1.7%. This is a very attractive return for foreign buyers. There is no place in the world where you can get 1.7% on a currency hedged basis. “
This is music for the ears of stockbrokers, who are also hopeful that one of the main concerns for rising bond yields – inflation – will also drop quickly.
“Any price increase we see for commodities is due to accumulated demand and the fact that the supply chain is stressed,” Alec Young, investment director at Tactical Alpha, told me. “But whenever the balance returns to the line, you will see prices fall again. Price increases are due to reopening, not long-term inflation, and the bond market has reacted excessively.”
However, even Young believes that the 10-year auction will be the main driver of the market. “It’s possible that a lot of traders will be holding their hands until the auction,” Maley told me.
What if the auction keeps rates close to 1.5%? This – for Alec Young – will be a sign that it is much safer to return to technology.
“Investors want to own technology,” he told me. “There is no deep loyalty to most reopened names. No one wants to give up Carnival Cruise Lines, or United Airlines or even Chevron. They want technology.”