Treasuries Edge Higher on Shutdown Risk, Blowout 7-Year Auction

  • Benchmark 10-year yield falls after remaining in tight range
  • Retreat from Nafta withdrawal is offset by looming shutdown

Treasuries rallied, led by shorter maturities, as investors weighed the prospect of a limited federal government shutdown when funding expires Friday. They held gains after an auction of seven-year notes drew a lower-than-expected yield.

The benchmark 10-year U.S. yield fell to 2.29 percent at 4:30 p.m. in New York. It broke out of the narrowest trading range of 2017 on a report that Democratic lawmakers threatened to oppose a short-term spending bill if Republicans push a vote on health-care. The spread between five- and 30-year Treasuries widened for the third-straight session as President Trump’s tax proposal raised the prospect of greater budget deficits.

The Treasury’s $28 billion seven-year note sale drew a yield of 2.084 percent, lower than expected heading into the auction and prompting a rally. Indirect bidders, which include foreign central banks and mutual funds, bought an unprecedented 81.7 percent.

  • 7Y auction seemed supported by underlying real money, bank demand that’s been an undercurrent over the week, and month-end bid support
  • Following reports during U.S. trading Wednesday that the administration was close to giving notice of intent to withdraw from Nafta, which hit risk assets, the White House during Asian trading hours said it wouldn’t terminate the agreement “at this time”
  • EGB outperformance sees German 10Y yields outperform U.S. by ~4bp
  • Treasuries received a morning boost from a dovish Draghi presser following ECB rate decision
  • Rolling eurodollar downside protection has been prominent over the week, specifically rolling put positions past FOMC’s May 2-3 meeting, with odds for a hawkish tilt to Fed’s discussions remaining low
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