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Bond Traders Ponder Tipping Point as Auctions Grow Ever Larger

  • Treasury’s auction-size increases bring supply back into focus
  • Sales of 3-, 10-, 30-year debt ahead as yields fall from peak

Treasury officials say they have no concern about demand for the ever-increasing slate of U.S. government debt. Bond investors are about to render their verdict.

The U.S. will issue a combined $73 billion of 3-, 10-, and 30-year securities this week, $7 billion more than the equivalent round last quarter, as issuance swells to plug growing budget deficits. The auctions are the first since the Treasury’s May 2 announcement that it would boost sales of coupon-bearing and floating-rate debt again, after doing so last quarter for the first time since 2009.

The bond market’s reception of the next wave of supply will do more than just dictate the government’s borrowing costs. Yields are near multi-year highs, and how investors digest the offerings will help determine whether the selloff resumes. Recent auctions aren’t necessarily cause for optimism, according to BlackRock Inc.’s Rick Rieder. Last month, demand was lackluster at some sales even with the elevated yields.

“What’s going to happen at these auctions -- how many auctions fail because we cannot absorb this much debt that they have to put into the market?” Rieder, the firm’s global chief investment officer of fixed-income, said in a Bloomberg TV interview Friday. “It’s a question of how you define failing, but you’ve had some really sloppy auctions.”

Plateau Period

After eclipsing 3 percent for the first time since 2014 in April, benchmark 10-year yields have plateaued. They ended last week at 2.95 percent after April U.S. employment data showed tepid growth in wages and jobs.

Given that 10-year yields have been within shouting distance of 3 percent for weeks, they may need to break through that level again to attract buyers, said Jim Caron, who helps oversee $83 billion in fixed-income at Morgan Stanley Investment Management. That could point to a selloff before the auctions kick in as dealers hedge before the sales or build in what’s known as a concession.

“We’ve been at these levels, 2.85, 2.90, 2.95 percent for so long, it’s just not interesting anymore,” Caron said. “You’ve had multiple opportunities to buy. To get people interested and excited, you have to be over 3 percent.”

The extent of foreign demand will be a focus amid worries that some of the biggest U.S. creditors may be stepping aside, just as the Treasury is ramping up sales and as the Federal Reserve trims its balance sheet.

At last month’s 10-year auction, foreign and international investors purchased just 12.8 percent, the lowest share since September, Treasury data show. It also marked their smallest takedown at an April offering of the maturity in four years. Overseas buyers took a similar slice of the 30-year sale, the least since January.

Dealers’ Burden

For traders, the most salient statistic may be how much of the auctions Wall Street is left to swallow. Last month, primary dealers had to pick up the slack in the 3- and 10-year auctions.

Even if dealers have to digest more than the 30 percent average they’ve absorbed at 10-year sales in the past year, the aftermath likely won’t be too taxing for the firms, said Michael Lorizio, a senior trader at Manulife Asset Management.

“I don’t think it’s going to break anyone’s back to take it down,” he said. “But any uptick in supply, it would be impossible to take that and really say that’s at all a positive for expectations for bullish price action.”

What to Watch This Week

  • North American Free Trade Agreement talks resume in Washington on May 7
  • Fed Chairman Jerome Powell speaks at a Swiss National Bank and International Monetary Fund event in Zurich on May 8
  • A bunch of Fed officials speak in Florida, one in Virginia and one in Missouri
    • May 6: Fed’s Randal Quarles gives welcome remarks on Amelia Island, Florida
    • May 7: Atlanta Fed’s Raphael Bostic, Dallas Fed’s Robert Kaplan and Chicago Fed’s Charles Evans all speak on Amelia Island; Richmond Fed’s Thomas Barkin in Virgina
    • May 9: Bostic speaks in Jacksonville, Florida
    • May 11: St. Louis Fed’s James Bullard speaks in Springfield, Missouri
  • The latest read on U.S. inflation is the highlight for economic indicators
    • May 7: Consumer credit
    • May 8: NFIB small-business optimism; Jolts job openings
    • May 9: MBA mortgage applications; producer price indexes; wholesale inventories
    • May 10: Consumer price indexes; initial jobless claims; real average weekly earnings for April; Bloomberg consumer comfort; Treasury’s monthly budget statement
    • May 11: Import/export price indexes; University of Michigan survey data
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