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Bond Traders' Big Feast: $250 Billion of U.S. Auctions in 3 Days

  • Yields near multiyear highs may lure buyers as offerings swell
  • Other big highlight in holiday-shortened week: FOMC minutes

Shaoul, Bianco, Gayeski on the Outlook for Markets

The latest debt-ceiling drama is over, and the floodgates are open for the U.S. Treasury to step up issuance. It’ll be up to bond traders this week to signal how much that extra supply will cost American taxpayers.

In a week shortened by the Presidents’ Day holiday on Feb. 19, the Treasury will pack in auctions totaling $258 billion. It begins with $151 billion of short-term bills, followed by a slate of two-, five- and seven-year maturities that’s $4 billion larger than last month.

It’s a lot for bond traders to chew on, especially after a bond-market rout pushed yields to multiyear highs last week. With little in the way of significant economic data ahead, the sales will provide the clearest gauge yet of just how steeply borrowing costs will need to rise as the U.S. debt burden swells.

“We’re going to have this theme for a while -- there’s a lot of issuance that has to come,” Jeff Rosenberg, chief fixed-income strategist at BlackRock Inc., said in a Bloomberg TV interview. “It’s not so much the demand -- it’s the demand at what price?”

The three- and six-month bill auctions this week will be the largest on record, at $51 billion and $45 billion, respectively. Investors are already demanding higher rates from borrowers across money markets, and that’s before the nation’s ballooning budget deficit causes even more short-term issuance later. Auctions are also rising as the Federal Reserve is moving to let bonds roll off its balance sheet.

Click here for more on the impending increase in U.S. debt sales

The two-year yield reached 2.209 percent last week, the highest since 2008. The five-year yield, at 2.6849 percent, touched the highest since 2010. The seven-year yield hit 2.874 percent, the highest since 2011. Solely from that perspective, these auctions may present an opportunity to step up and buy, and there are some big investors saying yields may not go much higher

But that’s not exactly the consensus. The two-year yield will rise above 2.5 percent by year-end, according to a Bloomberg survey. That’s in part because a growing chorus expects the Fed to step up the pace of rate hikes in 2018 as government spending heats up the economy.

In a note Friday, BMO Capital Markets strategists offered some words of wisdom they’ve picked up along the way: “There is no such thing as a bad bond, just a bad bond price.”

The Treasury is about to embark on some major price discovery.

What to Watch This Week

  • It’s a light week for economic indicators; the focus will be on minutes of January’s Fed meeting, Janet Yellen’s last as chair
    • Feb. 21: MBA mortgage applications; Markit U.S. manufacturing, services and composite PMIs; existing home sales and revisions; FOMC meeting minutes
    • Feb. 22: Initial jobless claims; continuing claims; Bloomberg economic expectations and consumer comfort; leading index; Kansas City Fed manufacturing activity
  • However, Fed speakers abound, and at week’s end the Fed releases its February 2018 monetary policy report to Congress
    • Feb. 21: Philadelphia Fed President Patrick Harker speaks on the economic outlook
    • Feb. 22: Fed’s Randal Quarles speaks on global economy in Tokyo; New York Fed President William Dudley speaks at briefing on Puerto Rico; Atlanta Fed President Raphael Bostic speaks at banking conference; Dallas Fed’s Robert Kaplan speaks in Vancouver
    • Feb. 23: Dudley and Boston Fed President Eric Rosengren speak about the central bank’s balance sheet; Cleveland Fed’s Loretta Mester participates in a panel in New York; San Francisco Fed President John Williams speaks on outlook for U.S. economy
  • Treasury auctions looms large with increased sale sizes
    • Feb. 20: $151 billion of bills and $28 billion of two-year notes
    • Feb. 21: $15 billion of two-year floating-rate notes and $35 billion of five-year notes
    • Feb. 22: $29 billion of seven-year notes

— With assistance by Alex Harris, and Jonathan Ferro

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