In normal times, this would be a dangerous week for fans of long dated treasure chests, but these are far from normal times.
A stronger than expected jobs from the US report on Friday opened a path for gains of longer-term time to climb and the curve to steepen. This week historically, large Treasury auctions can help, along with the prospect of another stimulus package and a possible capture in inflation data. However, rates are unlikely to go far. It has not paid off to bet against the appetite of investors for Treasuries amid a global health crisis.
The resurgence of the pandemic has reshaped the Treasury curve, burning the steepener trades that flourished between April and June in hopes that the U.S. economy would resume smoothly. The 2- to 10-year curve has dropped to just 43 basis points from 72 on June 5th. Last week it is barely twitched when the treasury’s treasury of its borrowing needs for the rest of the year blew through Wall Street expectations, to more than $ 2 trillion.
“Those trades, they just don’t work at the moment, in an environment where they should be if you add everything that happens,” said Tim Magnusson, a portfolio manager at Garda Capital Partners LP.
Various forces are weighing on the curve, not the least of which are grave concerns about the recovery of the US. Even the surprising addition of 1.76 million jobs last month, according to the latest figures from payrolls, pushed the 10-year-old’s benchmark just a few basis points higher Friday, to 0.56%. That is still within 25 basis points of their record low of March.
Moreover, Magnusson says upward pressure on yields is being monitored in the long run, as position in the steepener trade is still a bit full. He said the more speculative investors have not been driven out because they are not yet convinced that the US growth rebound has lost steam.
And then there’s the Federal Reserve, which buys another $ 80 billion a month in treasuries. That may not seem like much, as the Treasury is preparing to sell a combined $ 112 billion of three-, 10- and 30-year securities this week alone. But investors broadly expect the central bank to ratchet up its purchases of longer-dated treasuries, and a consensus has been built that policymakers will confirm this as soon as their September meeting.
As for the inflation picture, this week’s data is expected for consumer prices to pick up faster, by 0.8% year-on-year. That would be a reversal of the steep deceleration seen in March and April. It also jibes with a strengthening of market expectations for consumer price gains, which is reflected in an increase in breakeven rates for inflation-protected debt.
The 10-year-old breakeven has recovered from its slump in the wake of market turmoil, rising higher last week after the Treasury voted not to increase sales of inflation-linked securities even because it improved the size of other auctions.
But that rate is still around 1.6%, suggesting that inflation over the next decade will not come close to the Fed’s 2% target. And against the current economic background, price pressures are likely to remain relatively low on the market list to worry about.
What to see
- The calendar for economic data
- August 10: JOLTS job opening
- August 11: NFIB optimism for small business; producer price index
- August 12: MBA Mortgage Applications; consumer price index; real average income; monthly budget statement
- August 13: Import and export price indices; weekly unemployment claims; Bloomberg consumer comfort
- Aug 14: Sale; nonfarm productivity; industrial production; business inventories; University of Michigan sentiment
- The Fed calendar
- August 10: Charles Evans of the Chicago Fed
- August 11: Thomas Barkin of Richmond Fed; San Daly of San Francisco Fed
- August 12: Eric Rosengren of Boston Fed; Robert Kaplan of Dallas Fed; Daly
- August 13: Atlanta Fed Raphael Bostic
- The auction calendar
- August 10: 13-, 26-week reckoning
- August 11: Bills of 52 weeks; 3-year notes
- August 12: 10-year notes
- 13 Aug .: 4-, 8-week reckoning; Bonds of 30 years
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