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Surveillance: Bonds Feel the Love From Yellen's Shift in Sale
Treasury may not be gaming the market, but at some level, it’s paying attention
It’s Fed day on Wall Street and
no one seemed to care, which is odd because FOMC meetings are usually the Super Bowls of economic events.
One thing and one thing only was sucking all the oxygen out of the room: the
Treasury Department refunding announcement. And when it showed that the US government planned to concentrate new debt sales in shorter-term notes rather than longer-term ones, it turbocharged a rally in 10- and 30-year bonds. Add in some weaker-than-expected manufacturing data, and yields dropped even further.
There are a couple of takeaways here: First, Treasury supplies matter more than they have in decades given the growing US deficit and shifting institutional buyer base, notwithstanding Treasury Secretary Janet Yellen’s
focus on economic growth as a market driver. Second, US Treasury officials are aware of the dynamic in markets and seem to be going out of their way to avoid causing any more disruption than necessary.
Or as Morgan Stanley’s Seth Carpenter suggested, Treasury officials may not be gaming the market, but they are listening to it.
“They’re looking at what is the market about, where the market wants to pay up, and
where the market’s demanding a discount,” Carpenter said. “And at the margin they will lean a little bit more to where the market wants the paper, and lean a little bit away from the place where the market is pulling back.”
The quarterly refunding announcement came in smaller than expected at $112 billion of long-term securities, and yields on 10-years hit a session low afterward. Even the 30-year, which has been mostly north of 5% since mid-October, sported a 4-handle at one point.
Mike Schumacher at Wells Fargo foreshadowed the move, saying before the announcement that just a $1 billion difference in the allocation of maturities could make a big difference. The importance, he said, was less about the actual longer-term debt issuance and more the signal being sent by US government officials.
Still, there's a difference between a rip-roaring rally and some stability in longer-term yields that have been bouncing all over the place. Today's price action looked more like
traders finding a peak in yields rather than a trigger for a more sustained move lower in long-term borrowing costs, said Bank of America's Mark Cabana. After all, he said, the Fed isn’t budging off its higher-for-longer stance any time soon.
“If you’re a long term investor, stay neutral,” Cabana said. “And stay there until you see clear signals of economy cooling.”
