(Bloomberg) -- Treasuries traders are awaiting three U.S. debt auctions totaling $120 billion in coming days that have the potential to trigger another round of bond selling if demand starts to falter.
The U.S. Treasury will offer $58 billion of three-year notes Tuesday, $38 billion of 10-year securities the following day, and $24 billion of 30-year bonds on Thursday. A further possible catalyst looms on Wednesday in the form of inflation numbers for February, at a time expectations for rising prices have climbed to the highest level since 2014.
“The 10-year and 30-year auctions on Wednesday and Thursday will be closely watched as litmus tests, with weak demand likely adding fuel to bearish sentiment,” TD Securities Inc. rates strategists Gennadiy Goldberg and Priya Misra in New York, wrote in a note to clients published Monday. “Note that the cheapening of 10s -- outright and on the curve — suggests some auction setup.”
Traders have reason to be fearful of the coming supply given poorly bid auctions of five- and seven-year notes last month helped trigger off a Treasury slide that pushed benchmark 10-year yields above 1.60% for the first time in a year.
The rapid repricing of Treasury yields reflects improving expectations for the U.S. economy tied to vaccine rollout and fiscal stimulus. Many say the surge isn’t over yet and predict the 10-year yield -- hovering around 1.57% on Tuesday -- will keep climbing to the next threshold of 2%.
‘Much Quicker’
BNP Paribas SA is among the banks forecasting the 10-year yield will reach 2% by year-end, but “absolutely there’s a risk that this could happen much quicker,” said Shahid Ladha, head of Group-of-10 rates strategy in New York. “Everything seems to be pointing to a faster pace and bigger magnitude of repricing because the reopening of the U.S. economy and fiscal impulse are surprising to the upside.”
A further increase in yields will probably be led by intermediate maturities, reflecting increased expectations for an earlier start to Fed rate hikes, and flattening the yield curve between the 5-year and the 30-year points, Ladha said.
There are some Treasury positives to be found too. One is that tighter financial conditions caused by higher yields spark a stock-market selloff and revive demand for U.S. government securities as a haven. Meanwhile, Federal Reserve officials are in their self-imposed quiet period before their next policy decision on March 16-17.
Economists predict Wednesday’s inflation report will show the annual rate climbed to 1.7% last month from 1.4% in January, according to the median estimate in a Bloomberg survey. That would be the highest reading since February 2020.
The U.S. 10-year break-even rate, derived from the difference between the benchmark Treasury yield and its inflation-protected counterpart, is at 2.21% after climbed to 2.26% last month, the highest level since July 2014.
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