Treasuries Rise as Fiscal Stimulus, Inflation Expectations Ease

  • 10-year futures contract trades at year-to-date high
  • BlackRock’s Fink says 10-year yield could fall below 2%

Treasuries gained for a fourth day as fading odds of near-term fiscal stimulus extended a rally that began in Europe after strong demand at government bond sales, prompting traders to cover short positions ahead of the Treasury’s 10-year note auction.

Yields were lower across the curve by 1 to 5 basis points, with the 10-year yield down by about 5 basis points at 2.35 percent as of 3:12 p.m. New York time, reaching its lowest since Jan. 17. BlackRock Inc. Chief Executive Officer Laurence D. Fink said Wednesday there’s a growing probability that 10-year yields will fall below 2 percent amid delays in fiscal spending.

  • Treasuries pared gains after the 10-year auction was awarded at 2.333 percent, higher than its 2.314 percent yield in when-issued trading in the minute before the 1 p.m. bidding deadline; the 31 percent awarded to primary dealers was higher than the average for the last four quarterly 10-year auctions as investors took a smaller share
  • Before the auction, the 10-year futures contract, which currently tracks the price of a 7-year note (the cheapest-to-deliver security), rose as much as 14/32 to 125-17+, exceeding its previous YTD high; the 5-year note yield declined as much as 5.4bp to YTD low 1.793%
  • Most euro-zone 10Y yields closed lower by at least 5bp following strong demand for bond sales by Germany, Portugal and Finland
  • Gains for USTs were exacerbated by short positioning for the $23b 10-year auction, echoing what happened leading into last month’s 10Y sale, Odeon Capital strategist John Spinello said in note to customers; while USD/JPY near YTD low and “fiscal disappointment” provided the catalyst, “short squeeze on pre-auction setup” pushed the market to highs
  • TIPS lagged behind as inflation expectations were pared; the 5-year breakeven inflation rate declined to 1.93%, extending its retreat from a two-year high of 2.06% on Feb. 2
  • “The inflation/TIPS trade is in free fall,” consistent with USD weakness that reflects fading expectations for Fed hikes in H1, FTN strategist Jim Vogel said in a note; while overvalued, a reversal appeared unlikely before 2Q, “if the Trump agenda wasn’t gaining traction in D.C. by then”
  • The 30-year yield fell below 3 percent for the first time in two weeks; 5s30s curve extended Tuesday’s retreat from highest level since mid-December

— With assistance by Edward Bolingbroke, and Brian Chappatta

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