Treasuries Gain With European Bonds as ECB Said to Be Cautious

  • ECB reluctant to change message before June, Reuters reports
  • Treasury auction cycle concludes with $28b seven-year notes

Treasuries rose, erasing most of Tuesday’s corporate supply-induced declines, as euro-zone government bonds rallied on a report that European Central Bank policy makers are wary of altering their dovish message before June.

Yields were lower by three to four basis points at 3:30 p.m. in New York, with the 10-year yield down 3.6 basis points at 2.38 percent. The German 10-year yield fell as much as 5.1 basis points after Reuters reported that ECB officials said further increases in bond yields would be problematic. The ECB’s March 9 statement, which unleashed a selloff in bunds, was over-interpreted, the report cited one person as saying.

  • Treasuries reached session highs concurrently with bunds and held gains after $28b 7Y auction stopped through despite minimal concession into 1pm ET bidding deadline, even as two Fed officials signaled possible need for faster rate-hike path
  • Auction was awarded at 2.215% vs 2.219% WI yield at 1pm ET bidding deadline, fourth straight stop through by a 7Y auction, according to Stone & McCarthy
  • 71.17% award to indirect bidders was among highest on record, and 2.56 bid-to-cover was highest since November
  • Positioning was supportive, with speculators in process of covering extended shorts in TY futures, and month-end rebalancing will extend duration of Bloomberg Barclays Treasury Index by an estimated 0.07yr, another possible source of demand
  • After the auction, San Francisco Fed’s Williams said he wouldn’t rule out more than three rate increases this year; earlier Wednesday, Boston Fed’s Rosengren said he favored raising rates at every other meeting, implying four hikes this year, while Chicago Fed’s Evans said he supported one or two more rate increases this year
  • Flows in early U.S. trading included large buying in eurodollar futures: 18k EDH8 block at 7:15am, 50k EDH8 lift at about 7:30am and 35k EDZ7 block at 8:32am 
  • In European trading, curve steepeners were re-initiated by real-money accounts as 5s30s approached 105bp, narrowest since March 15

— With assistance by Edward Bolingbroke

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