(Bloomberg) — Demand for Treasury bonds is holding up as the U.S. government floods the market with more than $180 billion in new debt this week, evidence of the appeal of high yields on short-term bonds.
Most read from Bloomberg
Investors on Wednesday absorbed a $70 billion sale of five-year Treasury notes at slightly higher-than-expected rates, following even stronger demand for Tuesday’s auction of two-year Treasury notes.
Another $44 billion of issuance will take place on Thursday, with the sale of seven-year bonds. While appetite has been resilient, investors may be less receptive to buying longer-dated securities just days before the Treasury Department releases its quarterly redemption announcement and the Federal Reserve meets.
“It’s still an uncertain environment for adding duration, despite higher interest rate levels with nominal GDP around 5%,” said Gregory Faranello, head of U.S. rates trading and strategy for AmeriVet Securities. “Ultimately, a changed Fed narrative, an increase in volatility, and increased Treasury funding needs lend themselves to a more challenging environment for auctions further out of the curve.”
This week’s big supply – the last of the current funding cycle – is expected to help determine whether this is a turning point for the market, which has endured four consecutive weeks of losses. The rout pushed two-year yields briefly above 5%, a level some found attractive for bond managers looking to put money to work on short maturities.
Traders have scaled back the number of rate cuts they expect from the Federal Reserve and abandoned bullish bets. Driving inflation is a set of resilient economic data and indications that inflation will remain high for longer, further increasing the threat of government’s excessive borrowing needs.
Wall Street kept a close eye on the five-year selloff as investors looked for longer duration after concentrating 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 recommended going long on five-year Treasuries earlier this month, saying the duration “overcomes the Fed’s low and is not as exposed to heightened supply concerns” compared with longer terms.
Read more: Treasuries fade away from global bonds ahead of record US auction
However, government bonds were mostly weaker on Wednesday, allowing the market to absorb the five-year issue. Bond traders who underwrote the auction were left with 15% of the paper, below the recent average.
“The one notable aspect to me remains the sheer size going through it,” said George Catrambone, head of fixed income at DWS Americas. “The tail was modest.”
Investors are awaiting GDP data on Thursday and a key inflation figure at the end of the week, which could help shape expectations for the Fed’s path.
US policymakers will meet next week and announce an updated policy statement. Investors will also look forward to the next reading of the employment data for more clarity on the economy and the policy rate path from here.
(Adds context and commentary throughout.)
Most read from Bloomberg Businessweek
©2024 BloombergLP
