Demand for Treasuries is holding up as the US government floods the market with more than $180 billion of new debt this week, a testament to the appeal of high yields for shorter-term notes.
Investors absorbed a $70 billion sale of five-year Treasuries on Wednesday at a slightly higher-than-anticipated yield, following an even-stronger show of demand for the auction of two-year notes on Tuesday. The yield on the securities in the secondary market was little changed at 4.65% as the trading session kicked off in New York.
Another $44 billion of issuance is due on Thursday, with the sale of of seven-year notes. While appetite has been resilient, investors may be less receptive to buying longer-dated securities just days before the Treasury unveils its quarterly refunding announcement and the Federal Reserve meets.
“It is still an uncertain environment for adding duration despite the higher yield levels with nominal GDP running in the range of 5%,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “Ultimately, a changed narrative from the Fed, a pickup in volatility and increased funding needs from the Treasury lend itself to a trickier environment for auctions further out the curve.”
This week’s hefty slate of supply — the last of the current funding cycle — was expected to help determine whether this is a turning point for the market, which has weathered four straight weeks of losses. The rout briefly drove the two-year yield past the 5% mark, a level that some considered enticing to bond managers seeking to put money to work in short-dated maturities.
Traders have been scaling back how many rate cuts they expect from the Federal Reserve and abandoning bullish wagers. The driver has been a string of resilient economic data and evidence that inflation will remain high for longer, compounding the threat of the government’s outsized borrowing needs.
Wall Street was closely watching the five-year sale as the tenor has been sought by investors looking to increase duration after concentrating their bets on the shorter end of the curve, which is the most sensitive to changes in monetary policy expectations.
Bank of America Corp’s strategists including Mark Cabana earlier this month recommended going long five-year Treasuries, saying the tenor “captures the Fed cutting trough and is not as exposed to elevated supply concerns” compared to longer tenors.
Treasury bonds, however, were mostly weaker on Wednesday, helping the market to absorb the five-year issuance. Bond dealers underwriting the auction were left with 15% of the paper, below the recent average.
“The only remarkable aspect to me continues to be the large sizes going through,” said George Catrambone, head of fixed income at DWS Americas. “The tail was modest.”
Investors await GDP data on Thursday and an important inflation reading at the end of the week that can help shape expectations for the Fed’s path.
US policymakers will then convene next week and announce an updated policy statement. Investors will also watch for the next reading of employment data for more clarity about the economy and the policy rate path from here.
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