The market will welcome up to 125 billion US dollars in US bonds, including 58 billion US dollars of 3-year bonds, 45 billion US dollars of 10-year bonds, and 22 billion US dollars of 30-year bonds, which will test investors' demand for long-term bonds.
After experiencing a sharp rise last week, US debt is about to face a major challenge this week.
This week, the US will issue up to 125 billion US dollars in US bonds, including 58 billion US dollars of 3-year bonds, 45 billion US dollars of 10-year bonds, and 22 billion US dollars of 30-year US Treasury bonds. This will test investors' demand for long-term bonds.
This week's US bond auction may be a watershed moment in the US debt trend. Recently, investors' enthusiasm for long-term interest rate bonds has cooled down, and some companies have stated that they prefer short- to medium-term bonds such as 5-year terms to prevent continued high inflation.
There was a marked decline in US bond yields last week, mainly due to two major favorable factors. First, Federal Reserve Chairman Powell sent a dovish signal at the press conference, saying that the policy has been tightened enough, and that interest rates can be gradually cut after the inflation data continues to fall. Second, there was weak employment data. The number of new non-farm payrolls added in April was only 187,000, far lower than expected, and wage growth also slowed. This is seen as a sign of economic slowdown and moderate demand.
Affected by this, two-year treasury bond futures pricing already reflects the market's expectation that interest rates will be cut nearly twice this year; previously, only once. As a result, the two-year yield fell to 4.7% last Friday, down 30 basis points from the high at the beginning of last week.
However, despite the economic slowdown, inflation is still stubborn. The core PCE price index reached 4.6% per annum in March, far higher than the 2% target. Powell also stressed that inflation is still the biggest risk at present. The Federal Reserve will carefully evaluate data to decide when to cut interest rates, so there may be limited room for yield to decline.
Western Asset Management believes:
Benefiting from expectations that the rate hike cycle will peak, there is more room for short-term bond yields to decline. However, in order to actually flatten or reverse the curve, a marked decline in inflation is required. At that time, investors who avoid long-term bonds may in turn buy in large numbers, leading to a decline in long-term interest rates.
Editor/Somer