SUPERNEWS

Macro

10-Year Treasury Rally Hits Pause, $42B Auction Looms

Treasury rally pauses with $67 billion in auctions, as market eyes Fed rate cuts amid global bond rally test.

By Max Weldon

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5/8, 10:36 EDT
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Key Takeaway

  • The rally in 10-year Treasuries paused ahead of a $42 billion auction, with yields rising up to 3 basis points.
  • Expectations of Fed rate cuts, spurred by comments from Fed Chair Jerome Powell and weak April jobs data, have fueled recent bond buying.
  • Treasury auctions for May-to-July remain unchanged from the previous quarter, amidst high yield levels and inflation uncertainty.

Treasury Rally Pauses Ahead of Auctions

The recent rally in Treasury bonds, which saw the benchmark 10-year debt achieving its longest streak of gains since August, hit a pause on Wednesday. This pause came in anticipation of a significant auction of securities, with yields for all maturities rising up to 3 basis points in early trading in New York. The U.S. government planned to sell $42 billion of new 10-year notes and $25 billion of 30-year bonds, following a solid demand for a sale of three-year securities on Tuesday. Despite the rally, yields remained lower after the auction, indicating strong market appetite. The 10-year note's yield has been on a five-day decline, reaching about 4.49%, driven by expectations of Federal Reserve rate cuts and weak April jobs data.

Market Awaits Confirmation from Data

Subadra Rajappa, head of US rates strategy at Societe Generale, mentioned on Bloomberg Television that yields are expected to hover around 4.5% until there is confirmation from economic data. The Wednesday auction matched February's as the largest 10-year new issue on record, indicating a robust demand for Treasury securities. However, the future of these yields and the possibility of Fed rate cuts this year hinge on inflation trends, with Morgan Stanley projecting a later start to rate cuts than previously anticipated.

Global Bond Rally and US Supply Test

The global bond rally, fueled by hopes of lower U.S. interest rates, faces a significant test with the Treasury's $125 billion sales this week. This comes after Federal Reserve Chair Jerome Powell's less-hawkish-than-expected remarks and a surprising softness in recent jobs and wage data, which have led investors to adjust their bets for Fed easing. The market now fully prices a quarter-point cut by November, with a strong chance of two reductions in total this year. This week's sales will test whether investors continue to buy Treasuries after the recent slump in yields.

Street Views

  • Subadra Rajappa, Societe Generale (Neutral on the market):

    "For the most part, yields are going to hover around 4.5% until we have confirmation on the data front."