A pair of long-dated Treasury sales set for this week could help reignite this year’s rapid run-up in yields that has sent some frothier parts of the equity markets tumbling.
The turbulence has sparked renewed debate about potential plumbing problems in the deep well of the U.S. government bond market, a linchpin of global finance.
An auction for 10-year Treasury notes on Wednesday and 30-year Treasury bonds on Thursday will draw focus among investors wary that markets may be ill-prepared to handle the weight of burgeoning fiscal deficits, as the Biden administration and Congress push forward with another $1.9 trillion stimulus package.
“The bond market is starting to get concerned with how strong demand will be for these auctions, especially considering how brutal the 7-year auction went two weeks ago,” said Edward Moya, senior analyst at OANDA.
Until late February, market participants were able to take down several record-sized government debt auctions without much trouble, suggesting investors had largely shrugged off the impact of a deluge of new bonds set to enter the market coming into the spring.
However, the assumption that additional Treasury supply, to help support the economy through the pandemic, could be easily absorbed was challenged by the dismal showing for the 7-year Treasury note sale in February. Immediately after the auction, the 10-year note yield soared to 1.60% for the first time in a year, by some estimates.
The spike in government bond yields spilled over into U.S. equities, triggering a steady slide for the Nasdaq Composite
which ended in correction territory on Monday, but was trading 4% higher Tuesday as markets stabilized.
Since last month’s ill-fated Treasury sale, long-term government bond yields have looked to carve out a new range, but at a much higher plateau than at the end of 2020.
The 10-year Treasury note yield
fell 5.7 basis points to 1.537% Tuesday, after trading as high as 1.60% Monday. Meanwhile, the 30-year bond yield
slipped 3.9 basis points to 2.265%. Bond prices move inversely to yields.
A longstanding concern in the Treasury market has been that broker-dealers might experience periods of limited capacity on their balance sheets to make markets, thanks to post-2008 financial regulations that limited the risks banks could take. Most “primary” broker-dealers in the U.S. Treasury debt market are housed within large, global banks.
Indeed, analysts blamed a lack of willing buyers and a crowd of sellers for the poor 7-year note auction. Left to sop up the rest of the unsold Treasurys, dealers pushed yields higher in a bid to get the bonds off their books.
Marvin Loh, senior global market strategist at State Street, said yields could “certainly push higher if some of the market functioning issues crop up,” in an interview.
Despite all the concerns around appetite for the midweek debt sales, demand at least for the 10-year note likely will remain robust, largely for the same reason some market players worry the sale will struggle to draw buyers, according to Subadra Rajappa, head of U.S. rates strategy at Société Générale.
Specifically, the intense appetite for shorting bonds has made it difficult to source one of the more popular 10-year Treasury notes. As a result, the cost to borrow money for a short period, in return for lending out the benchmark debt security, turned negative last week, meaning investors have begun to pay interest to temporarily own the bonds.
This week’s auctions could help alleviate the scarcity of the notes, said Loh.