Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of Fixed Income Strategy
The US Treasury is set to auction $213 billion worth of coupon-bearing US Treasuries this week, spanning 2-, 5-, and 7-year tenors, along with a 2-year floating rate note auction not covered in this analysis. Despite July accounting for $122 billion in coupon redemptions and the quantitative tightening (QT) cap being reduced by $35 billion since June, the results of this month's coupon auctions have been so far mixed.
While the 30-year US Treasury auction received weak bidding metrics a couple of weeks ago, last week’s 20-year US Treasury bond sale showed good demand despite being one of the less favored tenors within the US yield curve. This favorable reception was likely due to the relatively small auction size of $13 billion, which is half the size of the auctions held during the COVID era. In contrast, the 30-year US Treasury auction was much larger, at $22 billion, which, although not at record high COVID levels, was still significantly larger than pre-COVID norms.
This week, the US Treasury continues its trend since April by auctioning record amounts of 2-, 5-, and 7-year US Treasuries. Investors might need to carefully select among these tenors, providing important insights into their comfort with adding duration to their portfolios, with a particular focus on the 5- and 7-year auctions.
We anticipate positive market reception for the 2- and 5-year US Treasury auctions, while exercising caution regarding the 7-year tenor. Although the auction size for the 2- and 5-year Treasury notes remains in line with the last three months’ record high levels, the notes’ risk-reward profile appears compelling amidst a continuously evolving macroeconomic landscape.
In contrast, the proposition presented by the 7-year notes is different, carrying the highest duration of the three and paying a low yield. Extending duration might be appealing as disinflationary pressures increase, economic activity slows down, and the Federal Reserve prepares to cut rates. However, uncertainty regarding the U.S. election or a potential reacceleration of the economy is keeping duration buyers on the sidelines.
The auctions come ahead of the second readings of US GDP on Thursday and PCE data on Friday. The belly of the curve (the 5- and 7-year tenors) is particularly interesting because these tenors are the first to react to shifting market sentiment. If investors believe the Fed's fight against inflation is not over, yields in the belly of the yield curve might soar faster than other tenors.
It's also important to consider the current macroeconomic context in which these auctions are occurring. The economy has been cooling, with U.S. real GDP growth decreasing from an annualized 3.4% in Q4 2023 to 1.4% in Q1 2024. However, economists expect a slight recovery in the second quarter, with an anticipated growth of 1.9% on an annualized basis.
As disinflationary pressures have recently accelerated, it’s likely that market participants expect the Federal Reserve to begin cutting rates soon, despite the slight uptick in growth. This anticipation could provide a tailwind for US Treasuries across the yield curve.
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28-June Bond Market Update: Market Awaits First Round of French Election Voting.
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30-Apr FOMC preview: challenging the March dot plot.
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08-Apr ECB preview: data-driven until June, Fed-dependent thereafter.
03-Apr Fixed income: Keep calm, seize the moment.
21-Mar FOMC bond takeaway: beware of ultra-long duration.
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18-Mar FOMC Preview: dot plot and quantitative tightening in focus.
12-Mar US Treasury auctions on the back of the US CPI might offer critical insights to investors.
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29-Feb ECB preview: European sovereign bond yields are likely to remain rangebound until the first rate cut.
27-Feb Defense bonds: risks and opportunities amid an uncertain geopolitical and macroeconomic environment.
23-Feb Two-year US Treasury notes offer an appealing entry point.
21-Feb Four reasons why the ECB keeps calm and cuts later.
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12 Feb Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high.
06 Feb Technical Update - US 10-year Treasury yields resuming uptrend? US Treasury and Euro Bund futures testing key supports
05 Feb The upcoming 30-year US Treasury auction might rattle markets
30 Jan BOE preview: BoE hold unlikely to last as inflation plummets
29 Jan FOMC preview: the Fed might be on hold, but easing is inevitable.
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16 Jan European sovereigns: inflation, stagnation and the bumpy road to rate cuts in 2024.
10 Jan US Treasuries: where do we go from here?
09 Jan Quarterly Outlook: bonds on everybody’s lips.