Treasuries Extend Losses After Tepid Demand for Twin Auctions

Treasuries extended losses after Tuesday’s two US government-debt auctions attracted tepid demand, that left dealers holding more paper than has been the case for recent sales.

Bloomberg
First Published28 May 2024
Treasuries Extend Losses After Tepid Demand for Twin Auctions
Treasuries Extend Losses After Tepid Demand for Twin Auctions

(Bloomberg) -- Treasuries extended losses after Tuesday’s two US government-debt auctions attracted tepid demand, that left dealers holding more paper than has been the case for recent sales.

Treasury yields rose to fresh session highs across the curve, with longer-dated maturities climbing more than 6 basis points, amid weak reception for the sale of $70 billion in five-year notes. That followed a tepid response from investors to a $69 billion sale of new two-year notes before midday. Offsetting the auctions’ lackluster results was the release of a report showing upbeat consumer confidence data and hawkish signals from Federal Reserve officials.

Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities, highlighted the challenge of “thinner markets coming off the holiday, coupled with two auctions in one day” and said “the data we’ve had of late has been better on the margin.”

Treasury sold new five-year notes at a yield of 4.553%, more than 1 basis point above the pre-auction level of 4.54%. Heading into the sale, the five-year had erased early gains and that weak tone was still not able to provide enough of a concession to make for a smoother auction result. 

Earlier, the first of Tuesday’s US government-debt auctions saw two-year notes sold at a yield of 4.917%, one basis point above the pre-auction level of 4.907%.

Dealers were left holding more than their usual shares of both auctions. The five-year sale left dealers with nearly 20% versus their recent average of 16.5%, while their stake of the two-year auction at around 17%, was a bit higher than the recent average.

“Like the 2-year note auction, the details of the 5-year note auction were soft,” with a “heavy dealer takedown,” and lighter bid-to-cover, a measure of demand, said John Brady, managing director at RJ O’Brien.  

Longer-dated yields were near session peaks, with the 30-year up 7 basis points at 4.64%, after a reading on May consumer confidence unexpectedly rose. It was the first increase in the measure in four months and the data came amid fresh hawkish remarks from Fed officials this week.

Minneapolis Fed President Neel Kashkari said Tuesday that while the US central bank’s policy stance is restrictive, policymakers haven’t entirely ruled out additional rate increases.

Read more: Fed’s Kashkari Says Rate Hike Not Entirely Ruled Out

Treasury yields have bounced off of their mid-May lows, as relatively solid economic data has spurred Fed officials to quash hopes for near-term easing and reinforce the view that rates will be kept higher for longer.

The US two-year note remains near the upper end of this month’s 4.7% to 5.03% range as traders price in just one cut this year, with a nearly 80% possibility that it happens in November. 

Traders will likely focus on New York Fed President John Williams’ speech at the Economic Club of New York on Thursday. At the end of this week, the central bank enters its communications blackout ahead of its two-day policy meeting starting June 11.

This week’s coupon auction calendar will end with a seven-year sale Wednesday. Once debt sales for Tuesday and Wednesday are absorbed, the market will focus on month-end-related flows that will coincide with Friday’s release of the central bank’s preferred inflation gauge — the personal consumption expenditures index. Economists expect the PCE deflator to have risen in April at an annual pace of 2.7%, the same as in March. An update on the first quarter GDP is due Thursday, and the release includes a price index measure that will focus the attention of traders.

“Seasonally May auctions are mixed and three of the last four auctions for the five year have tailed, so it’s not a complete surprise, but there may also be some lack of interest following a long weekend,” said George Catrambone, head of fixed income, DWS Americas. “Directionally GDP and PCE will provide a near-term path,” for the bond market. 

(Updates levels, adds 5-year auction result, DWS quote)

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.

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