The global bond rally ignited by hopes of lower interest rates in the US will face its first big test on Tuesday, when the Treasury kicks off $125 billion of sales this week.
Investors who have been piling into bonds since Federal Reserve Chair Jerome Powell struck a less-hawkish-than-feared tone last week will have to absorb $58 billion in three-year Treasuries on Tuesday as part of the so-called quarterly refunding auctions. A combined $67 billion of 10- and 30-year Treasury securities will come later this week.
The sales will show whether investors are keen to keep buying Treasuries after the recent slump in yields, with the two-and 10-year rates down more than 20 basis points over the past week. It will also test market appetite for longer-dated debt, which has soured among some investors.
“Yields have come down considerably over the past week so $125 billion of issuance should provide a good health check of current levels,” ING Bank NV rate strategists including Benjamin Schroeder wrote in a note. “In the short run the trigger for higher yields can still come from the US.”
US Treasuries rallied after Powell pushed back on the need to raise rates even further and signaled cuts were coming as soon as warranted by the data. The gains were boosted on Friday after a government report showed surprising softness in jobs and wage gains last month, adding to other recent evidence of slowing growth.
Investors cautiously upped their bets for Fed easing, with swaps tied to the central bank meeting dates fully pricing a quarter-point cut by November and a strong chance of two reductions in total this year. Prior to the latest FOMC meeting, markets were only pricing one cut for 2024.
Yields on 10-year Treasuries fell 5 basis points to 4.43% Tuesday, extending their decline over the past week to 25 basis points.
The gains in Treasuries spilled over to bond markets elsewhere, with 10-year German yields down almost 15 basis points over the past week and equivalent UK rates trading some 20 basis points lower. Australia’s 10-year note fell more than 10 basis points.
The continuation of the rally hinges on upcoming economic data and next week’s US inflation report for April is the most important market driver. While there are signs of deceleration in some areas of the US economy, inflation remains sticky — a reality that may limit what the central bank can do and means bond yields are likely stuck in their recent ranges.
US yields remain elevated compared with the levels seen earlier this year and that has helped keep buyers engaged in recent auctions. Data compiled by State Street, a custodian and asset manager, show allocations to fixed income rose 0.4 percentage point to 27.9% in April, the biggest monthly rise since March 2023, while allocations to equities and cash fell. Demand was concentrated in Treasuries, the data showed.
“If US interest rates really are going to be high and stable for now, investors may begin to re-assess their significant underweight in fixed income and look to have begun doing this in April,” Michael Metcalfe, head of macro strategy at State Street Global Markets.
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