The sell-off in the US bond market further intensified at the beginning of this week. The results of two US bond auctions on Monday showed that investors need a higher premium before they are willing to buy this batch of two-year and five-year treasury bond with a total size of 127 billion US dollars, which further deepened the anxiety in the US bond market. Later this week, crucial US inflation data will be released.
Market data shows that the yields of US Treasury bonds with different maturities generally rose overnight, causing the difficult decline in yields that occurred last Friday (indicating an increase in bond prices) to quickly subside. As of the end of the New York session, the 2-year US Treasury yield increased by 3.7 basis points to 4.731%, the 5-year US Treasury yield increased by 3.5 basis points to 4.318%, the 10-year US Treasury yield increased by 3.7 basis points to 4.286%, and the 30-year US Treasury yield increased by 3.3 basis points to 4.401%.
Although US bond yields briefly fell further during the Asia Europe session on Monday, they have since risen again since entering the New York session. The US Treasury Department auctioned US $63 billion of two-year treasury bond and US $64 billion of five-year treasury bond 90 minutes later, both of which were the highest auctions of these two types of maturities in history. In the end, the demand for these two US bond auctions was quite dismal.
The bid interest rate for the two-year US bond auction was 4.691%, and the bid interest rate for the five-year US bond auction was 4.320%, both higher than the pre issuance interest rate. This is also the first time since November last year that there has been a tail spread in the auction of 2-year US Treasury bonds. The bidding multiples for the two auctions were 2.49 and 2.41, respectively, while the previous one was 2.571 and 2.31.
After the auction results were released, the yields on US Treasury bonds of various maturities generally increased. The well-known financial blog website Zerohedge stated that due to poor demand in the first two of the three US bond auctions this week and market awareness of the large supply, it is not surprising that US bond yields soared to intraday highs after the results were released.
The US Treasury Department will also auction US $42 billion of seven-year treasury bond bonds on Tuesday. The highly anticipated January Personal Consumption Expenditure (PCE) Price Index in the United States will be released on Thursday, which is the Federal Reserve's most favored inflation indicator. Some bond market investors are now concerned that if the data shows that the cooling rate of price pressures is not fast enough, it may further exacerbate the selling pressure on the bond market.
The January Consumer Price Index (CPI) released two weeks ago in the United States showed a year-on-year increase of 3.1%, higher than market expectations of 2.9%.
Steven Ricchiuto, chief economist of Mizuho Securities in the United States, said: "If investors just sit here and say 'OK, maybe I'm not so sure about inflation returning to 2%', then you will see that the demand for treasury bond will not be so great. We have slightly broken through the upper end of the fair value trading range. Suppose you firmly believe that inflation will return to 2%, then (10-year US bonds) The fair value trading range should correspond to a yield of 3.75% -4.25%
According to data from the interest rate futures market, after unexpectedly exceeding expectations in CPI and PPI data last month, the market has almost ruled out the possibility of the Federal Reserve lowering interest rates at its March meeting, and even placed bets on the probability of a rate cut in June, which has now dropped to about 50%.
More investment banks delay the timing of QT reduction
It is worth mentioning that the stability of the overnight financing market since the beginning of this year has led more Wall Street strategists to believe that the Federal Reserve will be able to continue to shrink its balance sheet, and many investment banks have recently further postponed the estimated timing of QT write offs.
Strategists such as Steven Zeng from Deutsche Bank recently wrote in a report to clients, "The decline in hedge fund basis and relative value positions, as well as the related demand for repurchase financing, may lead to higher usage of the Federal Reserve's Overnight Reverse Repurchase Facility (RRP) than other scenarios, thereby reducing the urgency for the Federal Reserve to adjust its quantitative tightening strategy."
There are indications that since the beginning of this year, the demand for leverage or borrowing in the financing market has weakened due to stronger than expected economic data and more hawkish insistence from Federal Reserve officials that the central bank is cutting interest rates as planned but not soon. This has undergone a significant change compared to the situation at the end of last year, when the repurchase agreement market was squeezed, leading to a historic high in secured overnight financing rates - which led to a surge in so-called basis trading and an increase in leverage and short positions.
And now the situation is no longer like this. Deutsche Bank strategists noted that the short position of leverage funds in two-year, five-year and 10-year treasury bond bond futures has declined, which indicates that treasury bond bond basis and relative value positions may decline. If this scene continues until the end of the current contract cycle, it means that the demand for repurchase financing will decrease.
The calm in the financing market suggests that the rate of depletion of the Federal Reserve's overnight reverse repo tools may slow down, making it more likely for the Federal Reserve to delay the start of a slowdown in its balance sheet tightening schedule.
Morgan Stanley strategists led by Teresa Ho have also stated that they expect the Federal Reserve to announce a slowdown in the pace of balance sheet tightening at its June meeting, which is later than the bank's previous forecast of March. Small Mo strategists point out that due to the negative net issuance of US Treasury bonds, the asset management scale of money market funds is still close to historical highs, and the usage of RRP may stagnate in the coming weeks.
Earlier this month, strategists from Barclays and Bank of America also postponed their forecast for the Federal Reserve to begin QT write downs.
The minutes of the Federal Reserve's January meeting released last week showed that many officials suggested delving deeper into the balance sheet at the next meeting. Some Federal Reserve officials have stated that slowing down the pace of balance sheet reduction can make the transition period smoother, as they have noticed a decrease in the use of overnight reverse repo. Chairman Powell pointed out at the current meeting that the committee will delve into the issue of quantitative tightening and its assets at next month's meeting.