Silence is Golden
Today marks the start of a very busy week for participants in the US Treasury market. Holders will have been battered by the steep increase in yields in the last few weeks and now, on top of that, come three days of heavy fresh supply.
In aggregate we will see issuance of $258 billion from the US Treasury over the next three days. Today’s focus comes at the very front end of the curve with $151 billion of short term bills (1 month, 3 month and 6 months ), followed by $28 billion of 2 year notes.
Tomorrow there will be $15 billion of 2 year floating rate notes, plus $35 billion of 5 year fixed rate notes. Then on Thursday appetite will be tested a little further along the curve with the issuance of $29 billion 7 year notes.
Admittedly, this issuance is all towards the front end of the yield curve, but the 5 year and 7 year results will be a good test of the markets’ appetite for what will be a year of ongoing high supply.
It is not until next month’s auctions on March 12 and 13 that we will see a reopening of the 10 and 30 year bonds, which will give us a better picture of demand at the long end. However, with yields on the 10 year slowly marching towards the 3% number, this is bound to be a level where many investors will take note.
Meanwhile though, until markets either get to 3% for 10 year yields, or the auctions clear, it seems almost inevitable that the ratcheting higher of longer dated yields is set to continue for now.
The front end, however, and in particular the 2 year point, should find some stability after today’s auction now that the Fed’s dot plots are properly priced in. Conversely, we think, 3 and 5 year notes will remain under pressure as the curve has not yet adjusted to the reflationary fears and the increased likelihood that the Fed will follow through with its forecast of future rate hikes.
So from our standpoint, we will still be observing moves from the short end in rates markets rather than making room for the fresh supply.