Demand for U.S. Treasuries will be tested this week as $183 billion of notes are due to be auctioned, with one seven-year note sale likely to be closely watched after an auction of that maturity stumbled last month.
The U.S. Treasury Department has increased debt issuance dramatically in the last year to finance stimulus measures to combat economic fallout from the coronavirus pandemic. Issuance in 2021 is slated to rise to $4 trillion, according to ING.
The supply increase, alongside the Federal Reserve’s pledge to keep monetary policy loose while economic growth and inflation rise, has contributed to rising Treasury yields. Investors will also focus on Fed Chair Jerome Powell on Tuesday, who is expected to be peppered with questions at a congressional hearing https://www.federalreserve.gov/newsevents/testimony/powell20210323a.htm about the potential risks from the Fed’s super-easy policy including its bond buying program.
Last week, the benchmark 10-year Treasury yield, hit 1.754%, a 14-month high. It traded around 1.68% on Monday.
The Treasury will sell $60 billion of two-year notes on Tuesday, $61 billion of five-year notes on Wednesday and $62 billion of seven-year notes on Thursday.
“I think there’s good reason for optimism for the auctions this week,” said John Canavan, lead analyst at Oxford Economics.
He said Feb. 25′s $62 billion seven-year note auction, which resulted in the lowest demand ratio for that maturity on record, was an outlier and that auctions for other maturities since then have gone “quite well.”
Last week’s $24 billion, 20-year bond auction saw aggressive bidding, with a bid-to-cover ratio, a gauge of demand, of 2.51 to 1, compared to February’s auction that resulted in a 2.15 to 1 ratio, the lowest since the maturity was relaunched in May 2020.
Canavan also pointed to an expected uptick in foreign demand and growing flows into taxable government bond funds, citing Investment Company Institute data with continued inflows perhaps supported by taxpayers investing stimulus cash.
“The investment fund demand and foreign demand, which are the two primary drivers of auctions, have largely so far kept pace with the increased auction sizes over the past year,” he said. “Even if the investment fund demand starts to plateau, that just means that while (bid-to-cover ratios) won’t be extreme, they’ll still be strong.”
Zachary Griffiths, macro strategist at Wells Fargo, said while auctions of 10-year notes and 20- and 30-year bonds this month were deemed to be fairly successful, trading in the auction aftermath was lower in price.
“These auctions have become liquidity events and people are taking advantage of that, but you’re still seeing some difficulty in trading on the follow through, which suggests that underlying demand is not all that sturdy,” he said.
He added that even though five- and seven-year note yields are more attractive than a month ago, those auctions may be a bit more challenged than the two-year note auction, which should probably do well.
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