The recent overall rebound in the US treasury bond bond market is about to face the next major test at the beginning of this week: a US bond auction will help measure whether investors are convinced that the bond market sell-off storm in 2023 has completely ended
Stimulated by signs of slowing inflation and slowing economic growth, traders and investors recently plunged into the US treasury bond bond market. They believe that the Federal Reserve has completed interest rate hikes and will turn to interest rate cuts by the middle of next year. The emergence of a large number of bottom buying funds stopped the continuous decline of US treasury bond in the past six months, and pushed the US bond market up 2.6% in November. This is the largest increase since March, when people were worried that the banking crisis would drag down the economy and bought safe haven US bonds.
(Bloomberg US Composite Bond Index returns begin to turn positive during the year)
At the same time, the sharp rise in bond prices this month has pushed the US bond yield to the lowest level since September, which makes the demand of the US Treasury Department's 20-year treasury bond bond auction on Monday a key "test" for investors to judge whether the recent reversal of the bond market trend can continue.
Concerns about whether the market can accept a large number of US bond auctions were evident in the 30-year treasury bond bond auction earlier this month, when the Ministry of Finance had to offer an abnormally high yield premium to sell treasury bond bonds, leading to a temporary slump in the US bond market.
For most of the past three years, the auction of 20-year treasury bond bonds by the US Treasury Department has been a market burden because the demand is far less than that of 10-year and 30-year treasury bond. At the same time, 20-year treasury bond bonds were never auctioned during the shortened Thanksgiving week. Therefore, whether tonight's auction can gain market popularity will be of particular concern to people.
William Marshall, head of US interest rate strategy at BNP Paribas, said that the auction of (20-year treasury bond) would be a good "rational check" to determine whether the evolution of data has shifted from a meaningful way to a more stable/constructive way to absorb long-term supply.
In the past year, the confidence of bond market traders has been hit by unexpectedly strong economy and stubborn inflation. The constantly expanding federal deficit is also a key reason, testing the market's ability to absorb all new debt.
But this month there are signs that the labor market is cooling down and inflation is being suppressed, which makes people more confident that the Federal Reserve's monetary policy is already sufficiently restrictive. At the same time, the quarterly increase in refinancing announced by the US Treasury Department was smaller than many bond traders' expectations, especially in the auction of long-term bonds, thus alleviating some market supply concerns.
Marshall pointed out that although the 20-year treasury bond has been affected by weak demand for a long time and its yield has always been higher than the 30-year treasury bond, the 20-year treasury bond has always performed well in the auction since the US Treasury Department earlier reduced the auction size of 20-year treasury bond relative to 10-year and 30-year treasury bond. Monday's auction was $16 billion, compared with $24 billion for 30-year treasury bond bonds earlier this month.
Even so, in fact, the recent 20-year treasury bond have not kept pace with the overall rise of the treasury bond market, and people may still have some concerns about this week's auction.
William O'Donnell, interest rate strategist of Citigroup, said when talking about this week's treasury bond auction, people know that there may be a trading volume and liquidity vacuum in the next week, but you can imagine that the market will try to make room for it. He pointed out, "I don't think supply will become a sharp problem that the market is worried about now. On the contrary, we may feel that supply is insufficient, as was the case last Tuesday. In the rebound triggered by CPI data in October, the yield of five-year treasury bond bonds fell 25 basis points a day."
Other Focus of the Week
Of course, in this trading week shortened by the Thanksgiving holiday, there are still many other areas of focus besides the US bond auction.
The main economic indicators for the United States this week include durable goods orders for October. Globally, purchasing managers' indices for the UK and eurozone will also be released.
It is certain that market concerns still exist. The decline in US bond yields last week is also partly related to the recent sharp decline in oil prices. However, as oil prices rebounded from their lowest level since July last Friday, the rebound journey of US bonds also faced resistance.
In addition, given that traders have heavily anticipated that the Federal Reserve will shift to interest rate cuts by June and accumulate a total of nearly 100 basis points by the end of 2024, there is also a risk of excessive dove betting. Federal Reserve officials themselves predicted in September that interest rate cuts would not exceed once next year.
The problem is that as the market prices loose policies aggressively, there is a risk of higher yields, as we have seen before, especially if the Fed's remarks at the December meeting are more cautious, "said Leslie Falconio, head of taxable fixed income strategy at UBS Global Wealth Management
The Federal Reserve will release its November meeting minutes at 3am Beijing time on Wednesday. At that meeting, the Federal Reserve suspended interest rate hikes as scheduled, while Federal Reserve Chairman Powell's attitude towards rate hikes was not as hawkish as before, driving a significant decline in US bond yields. However, just a week later, the wording of Federal Reserve officials such as Powell generally leaned towards hawks, making it highly suspenseful how the minutes will more comprehensively reflect the true attitude within the Federal Reserve.