NEW YORK: US Treasuries prices were steady on Monday in light summer trading, with no new information to break bond yields out of their recent range.
Retail sales data on Tuesday is the next focus for the market. Traders are closely scouring economic releases for signs of the strength of the recovery, with most expecting that the Federal Reserve will start reducing its $85 billion-a-month bond purchases in September if signs continue to show that the econonmy is gaining steam.
The most important data in coming weeks, and potentially the only one with the sway to alter the Fed's course, will be the release of the jobs report for August on Sept. 6, the last payrolls report before the Fed's meeting on Sept. 17-18.
Trading activity is likely to remain relatively light this month, with volatility seen increasing ahead of several major events, in addition to the Fed's highly anticipated meeting.
"We expect volatility in US rates markets to pick up significantly in the fall. There is uncertainty with nominating the next Fed chair, big elections in Germany and then the debt ceiling," said Boris Rjavinski, an interest rate strategist at UBS in Stamford, Connecticut.
The Merrill Lynch MOVE index, which estimates the future of volatility of long-term yields, has ebbed from a high of 118 on July 5, when fears over bond tapering caused a broad bond selloff. The index closed at 75.4 on Friday.
Treasuries yields held on Monday in the middle of a range they have traded in since the beginning of July.
Benchmark 10-year notes were last up 3/32 in price to yield 2.57 percent. The yields are down from a two-year high of 2.76 percent on July 8, but up from the bottom of the recent range of 2.46 percent on July 17.
In the near-term, retail sales on Tuesday will be watched for signs over the strength of consumer spending, and the Fed will release the minutes of its July meeting on Aug. 21.
"Minutes will be the next really big focus," said Ira Jersey, interest rate strategist at Credit Suisse in New York. Overall, "we're in the summer doldrums."
The Fed bought $1.496 billion in debt due from 2036 to 2043 on Monday as part of its ongoing purchase program.
SUPPLY REDUCTION
Bond investors are also focused on further cuts in Treasury issuance as the US government's borrowing needs decline on stronger tax receipts.
The Treasury reduced its outstanding Treasury bills by $139 billion in April and July, the second largest shift since 1995, according to UBS. It is likely to continue to reduce bill supply, and extend some cuts to two-year and three-year coupon debt if trends persist, the bank said.
Increasing demand for high quality debt at the same time as the Treasury reduces supply is leading some to fear that the short-term rates markets could be disrupted if demand sends T-bill yields negative, and creates liquidity problems in the repo market.
UBS sees the markets remaining stable if the Treasury holds a stock of outstanding bills of around $1.25 trillion, which would leave it room to keep cutting from $1.55 trillion outstanding at the end of July.
"There is a great amount of demand for bills, most of the large central banks are buyers of bills because they run conservative portfolios, and with new regulations and central clearing, demand for high quality collateral will continue to rise," said Rjavinski of UBS.
"We think the Treasury will be fairly judicious in how much they reduce the net bill supply," he added.
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