Bonds’ Best Month Since March Faces ‘Sanity Check’ in Auction

The Treasury market’s nascent rally is facing its next big test: a bond auction that will help gauge whether investors are confident 2023’s selloff is over once and for all.

Spurred by slowing inflation and signs of a cooling growth, traders and investors have recently rushed headlong into US government debt, convinced that the Federal Reserve is done raising interest rates and will shift to cutting them by the middle of next year. That’s ended a six-month losing streak for Treasuries and pushed the market to a gain of 2.6% in November. It’s the biggest advance since March, when there were fears that a banking crisis would sink the economy.

But this month’s advance has driven yields to the lowest levels since September, turning the demand at Monday’s 20-year auction into an indicator of whether investors see a risk the recent trend will reverse. Such concerns were evident in the 30-year auction earlier this month, when the market briefly tumbled after the Treasury had to offer an unusually large yield premium to sell the securities.

The Treasury’s 20-year bond has been an albatross for much of its three-year existence, during which it has never been sold during the holiday-shortened US Thanksgiving week. So a strong reception would be a particularly powerful endorsement of the rally.

The sale “will be a good sanity check for the notion that the evolution of data has in a meaningful way shifted to more stable/constructive for how duration supply gets absorbed,” said William Marshall, head of US interest-rate strategy at BNP Paribas.

The confidence of traders has been rattled over the past year as the surprisingly strong economy and stubborn inflation quashed several rallies that broke out on speculation the Fed would stop raising interest rates. The swelling federal deficit — which is testing the market’s capacity to absorb all the new debt that’s financing it — has also played a role.