Global Bond Rally Faces Supply Test as US Refunding Starts

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

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.