The Treasury market remains in tenuous calm as traders fear that tensions between the United States and China will intensify in the hope that the lukewarm pace of reopening of American businesses will accelerate.
The gap between Washington and Beijing has gone beyond pandemic issues to include anxiety over China’s national security actions against Hong Kong. This backrop has sapped the risk appetite of investors and supported the demand for treasury bills as a paradise. However, bond bears are not giving up, emboldened by the relaxation of social distancing measures in many American states and by the expanding Treasury supply pipeline.
Ten-year treasury bill yields have hovered in a range of only about 24 basis points since the start of April, after the chaos of March, when concerns about the pandemic were at their height. The ICE BofA MOVE index, an option-based indicator of the implied volatility of treasury bills, is at a level that represents about a third of the nearly 11-year high reached on March 9. President Jerome Powell participates in a virtual round table on the last day of the shortened holiday week.
“US-China relations appear to be on the boil and this continues to influence trade, putting downward pressure on yields,” said Marty Mitchell, an independent strategist. “This compensates for the optimism associated with the reopening of the economy and the fact that the spread of the virus has not experienced a major resurgence. It leaves Treasury bills in a stubborn side fork.”
Ten-year yields have hovered around 0.66%, having fluctuated between a minimum of 0.54% and a maximum of 0.78% since early April. The benchmark long-term borrowing rate quadrupled in March. In the midst of calm, the spread between 2 and 10 year yields stabilized at around 49 basis points.
The market is expected to digest another round of treasury supply in the coming week, although it is enjoying a respite from a recent dose that has been tilted towards longer maturities. Only tickets and tickets maturing within seven years will be auctioned. This should distort the curve, as strategists also see long-term debt supported by portfolio rebalancing effects at the end of the month, given that the main bond indices are likely to have a large expansion.
The issuance of treasury bills exploded due to budget support to address the growth effects of the coronavirus pandemic. And as Secretary of the Treasury, Steven Mnuchin, predicts that Congress will have to do more, some predict the end of the bond market tranquility.
“The unprecedented amount of fiscal stimulus implemented should lead to a rebound in longer-term rate volatility,” said Subadra Rajappa, head of US rate strategy at Societe Generale, in a note.
What to watch
• American markets are closed on Monday for Memorial Day
• The economic calendar:
-May 26: national activity of the Chicago Fed; housing price index; FHFA housing price index; S&P CoreLogic Housing Price Data; Confidence and expectations of the Conference Board consumers; sales of new homes; Dallas Fed manufacturing activity
-May 27: MBA mortgage applications; Richmond Fed manufacturing activity; Beige Fed Book
-May 28: second reading of first quarter GDP; personal consumption; durable goods / capital goods; unemployment benefit requests; Consumer comfort Bloomberg; pending home sales; Kansas City Fed manufacturing activity
-May 29: advance of the trade balance of goods; retail inventories; personal income / expenses; personal consumption expenditure deflator data; MNI Chicago PMI; University of Michigan sentiment / current conditions / expectations
• Powell is the highlight of the Fed speakers:
-May 26: Neel Kashkari of the Minneapolis Fed
-May 27: James Bullard of the St. Louis Fed; Atlanta Fed President Raphael Bostic
-May 28: John Williams of the New York Fed; Patrick Harker of the Philadelphia Fed
-May 29: Fed Powell President in virtual discussion with former Fed Vice-President Alan Blinder
• Here is the Treasury auction calendar:
– May 26: US $ 63 billion over 13 weeks, US $ 54 billion over 26 weeks and US $ 65 billion over 42 days of cash management; US $ 44 billion 2-year notes
May 27: US $ 40 billion in 119-day cash management invoices and US $ 25 billion in 273-day cash management invoices; US $ 20 billion in 2-year floating rate notes; US $ 45 billion 5-year notes
– May 28: invoices of 4 and 8 weeks; US $ 38 billion 7-year notes