Key Treasury Bond Auctions Along Yield Curve Next Week with Newly Hawkish Fed

Following the turmoil in the market this week following the Federal Reserve System Chairman Jerome Powell took a decidedly hawkish tone today at last month’s FOMC and the release of Minutes yesterday which sent US stock markets sharply lower. In the Treasury market the 2-yr yield, which tracks expectations for the fed funds rate, rose seven basis points to 0.83%. The 10-yr yield settled the session four basis points higher at 1.71%, with growing expectations for a run-up to 2.00%.

CME FedWatch Tool shows the probability for a rate hike in March increased to 67.8% today, versus 59.7% yesterday and 27.1% one month ago. 

The U.S. Treasury has announced that next week they will auction

  • To Sell $52 Bln In 3-Year Note (est $52 Bln)
  • To Sell $36 Bln In 10-Year Note (est $36 Bln)
  • To Sell $22 Bln In 30-Year Bond (est $22 Bln) 

We will look at the six-month average to gauge sucess

  • Bid to cover, the number of bids in dollar terms versus the auction amount
  • Average of the direct bidders (measures domestic demand)
  • Indirect bidders (measures international demand).

If the number of bids is less, if domestic and international demand starts to slow, and the US primary dealers who make markets in US debt are left holding more than they want or need, it could lead to a further spike in rates.

Markets being market look for equilibrium and will move paper between now and the auctions, for a level to push rates higher in an attempt to attract demand at higher rates. To mitigate that could be safe haven demand from the market crashing, geopolitical events and the like. Right now, there is the US jobs number tomorrow and the events in Kazakhstan

Important to note that the Fed has so far not exhausted their buying appetite, they are tapering, which means still buying but buying less. The Fed is still buying treasuries to replace maturing issues to keep the balance sheet whole.

These auctions will come more in focus for equity traders, they always are for bond traders over the next few months. The implications of sharp moves higher in rates are well known on economic growth, inflation, housing, and stocks. The big one is with the massive debt could also lead to a higher US deficit as the government this forced to pay higher rates to attract capital to fund the deficit.

Thursday at lunch the 2-yr yield, which tracks expectations for the fed funds rate, is up four basis points to 0.87% on increased expectations the Fed to act more quickly in normalizing policy after yesterday’s Minutes. This current level is still in-line with expectations for three rate hikes this year, but some are even thinking the Fed could do four hikes this year. 

The first-rate hike is likely to occur in March, as the CME FedWatch Tool currently has the probability of that happening at 71.4%. The Fed doesn’t like to surprise the market, but incoming data could always alter these expectations. 

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From The TradersCommunity US News Desk