Rocky Path bond traders brace for auction


(Bloomberg) – No one would choose to sell bonds under these conditions – which could result in a shortened holiday week in the US Treasury market.

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In order to complete the monthly cycle of two, five, and seven-year bills before Thursday’s vacation, the Treasury Department stuffs them on Monday and Tuesday, which hasn’t gone well in the past. The risk of a Federal Reserve presidential nomination announcement that the White House has promised ahead of Thanksgiving, in addition to the dozen economic releases on Wednesday, is making matters worse.

Meanwhile, Treasuries remained under pressure on Monday as US equity futures extended their gains and gilt yields climbed.

The extraordinary volatility of short-term yields especially over the past month was given a second lease of life on Friday amid the threat of European pandemic lockdowns. On Friday, the yield on the two-year note fell as much as 5.8 basis points as government bond markets around the world assessed the possibility of another economic downturn that could prevent rate hikes in the central bank. U.S. traders have lowered the Fed’s rate hike expectations, with a take-off pushed back to September from July next year and two hikes still expected by the end of 2022.

The moves were later canceled after comments from Fed officials Richard Clarida and Christopher Waller on the potential for a faster reduction in asset purchases. Still, two-year yields have seen nine daily movements exceeding three basis points since October 15, down from just five this year so far. The wild price action has unfolded – pushing the ICE BofA MOVE index of expected volatility to the highest level since March 2020 – as consumer price inflation has reached levels that challenge the tentative plan the central bank to reduce its asset purchases until mid-2022 and turn to increasing interest rates as soon as that.

The decrease in liquidity as well as the ever-increasing volatility and uncertainty regarding the political trajectory could certainly have an impact on the reception of the next Treasury auctions, even if the market is expected to absorb less nominal supply after the supply cuts, Credit Suisse strategist Jonathan Cohn said. “What will be particularly interesting to watch, outside of the auction process, is how the market digests it during the holidays and at the end of the month.”

Since 2012, when the Treasury’s auction cycle coincided with Thanksgiving week, the seven-year sector has seen an average decline of about six basis points in the first week of December, Cohn said. In other years, it has averaged a rally of 4 basis points.

At the same time, market players are waiting for US President Joe Biden to announce his choice for the Fed Chair. A decision to appoint Lael Brainard instead of Jerome Powell for a second term could quickly re-price US short-term rates – upsetting auction calculations even if the shock wears off relatively quickly.

“The markets will have a kind of immediate knee-jerk reaction to the choice of chair, but once that is sorted out there won’t be a huge change in the outlook for the next two quarters,” said Victoria Fernandez, strategist in Head of Markets Crossmark Global Investments. .

To complicate matters further, the quarterly process of swapping expiring Treasury futures for new ones is expected to intensify over the coming week, and the erosion of liquidity in the spot market has returned ” particularly risky two-year calendar rollover.

What to watch

  • Economic calendar:

    • November 22: Chicago Fed national activity index; Sales of existing homes

    • November 23: Markit US Manufacturing and Services PMI; Richmond Fed manufacturing index

    • November 24: MBA mortgage applications; unemployment benefit claims; wholesale stocks; trade balance; second reading of GDP in Q3; durable goods orders; personal income and expenditure (with PCE deflator); University of Michigan Consumer Sentiment Review; sale of new homes

  • Fed Calendar:

  • Auction calendar:

    • November 22: invoices at 3 and 6 months; tickets at 2 and 5 years old

    • November 23: 35-day cash management invoice; 2-year variable rate security; 7 year ticket

    • November 24: 119-day CMB; Invoices at 4, 8 weeks

(Corrects story posted at 7:59 a.m. New York time to remove the erroneous characterization of Thanksgiving Week auctions in the seventh paragraph.)

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