Treasury prices weakened Monday, pushing up yields, as investors sold U.S. government paper in preparation for a busy week of bond auctions.
What are yields doing?
The yield on the benchmark 10-year Treasury note TMUBMUSD10Y, +1.29% rose 2.9 basis points to 2.860%, while the 2-year note yield TMUBMUSD02Y, +0.33% rose 1.8 basis points to 2.561%. The 30-year Treasury bond yield TMUBMUSD30Y, +1.27% was up 2.6 basis points to 2.966%. Yields and bond prices move in opposite directions.
What’s driving the market?
Traders gearing up for this week’s raft of bond auctions have been selling U.S. government paper as part of the ‘concession’ process. Market participants will try to push yields higher, and prices lower, to ensure a successful bond auction. With long-dated debt having rallied in the past few weeks, investors say there’s room for bonds to cheapen ahead of the auctions.
The Treasury Department is set to sell $69 billion of bonds this week.
After the recent tax cuts and boosts to spending caps, the limited inventories of primary dealers have groaned against the increase in debt supply. The worry is primary dealers might pull back demand, backing up their bids in the auctions, to avoid further straining their balance sheets. One of the primary dealers’ key responsibilities is to take part in the Treasury Department’s auctions, where they are expected to act as a backstop.
See: This sign of strain indicates U.S. bond auctions could get ‘sloppier’: Jefferies
Yields fell on Friday after a stronger-than-expected rise in June nonfarm payrolls was offset by a rise in the U.S. unemployment rate rose to 4% from 3.8% while wage gains remained subdued. The rise in the unemployment rate came as more people joined the workforce, which combined with the subdued wage growth helped ease inflation concerns.
Investors will now turn their attention to June’s consumer-price index report on Thursday. Signs of an upswing in inflation are likely to give the Federal Reserve additional encouragement as investors wonder if a potential trade war will derail the central bank from it’s hiking path.
The recent minutes from the central bank’s June policy meeting showed senior Fed officials felt the economy was strong enough to handle the gradual rate hike trajectory of one per quarter.
What are analysts saying?
“So far this year, there has proven to be ample demand for Treasurys at auction and with the richening that has occurred over the past few weeks, we expect a modest concession will be in order,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a Monday note.