The curve moved flatter yesterday as large buyers bid up the long end of the curve, moving the yield on the 30-year to 4.243%, its lowest point since July 13th. Despite the move lower in yields on the 10- and 30-year, the 10-year breakeven yield widened out 8 basis points. It seems to me that the long end is trading with every macro factor in mind except inflation, while the TIPS market is focused entirely on expectation for higher consumer prices. The movement the past few days has created a disconnect between the two markets. I know I have concentrated on TIPS a lot this week so I will just leave it at that.
Next week’s supply was announced yesterday and will be just under what the street expected. The Treasury will auction $109 billion in 2-, 5- and 7-year notes, $2 billion less that the $111 billion expected. Bonds rallied on the better than expected supply news but the market still stands to face a few headwinds come next week. The auctions earlier this month were refunding auctions, meaning that the majority of bonds auctioned were just replacing ones that were maturing at the same time, meaning the “net new issuance” was small. That is not the case this week. These are for the most part new bonds that need to find new money. That, coupled with a short staffed street, creates the potential for higher clearing yields, lower bid/covers and longer tails to the current market. Next week may be a wild ride.
Cliff J. Reynolds Jr., Investment Analyst
Next week’s supply was announced yesterday and will be just under what the street expected. The Treasury will auction $109 billion in 2-, 5- and 7-year notes, $2 billion less that the $111 billion expected. Bonds rallied on the better than expected supply news but the market still stands to face a few headwinds come next week. The auctions earlier this month were refunding auctions, meaning that the majority of bonds auctioned were just replacing ones that were maturing at the same time, meaning the “net new issuance” was small. That is not the case this week. These are for the most part new bonds that need to find new money. That, coupled with a short staffed street, creates the potential for higher clearing yields, lower bid/covers and longer tails to the current market. Next week may be a wild ride.
Cliff J. Reynolds Jr., Investment Analyst
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