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Markets

Yields ease on expectations for lower debt supply

  • The 10-year Treasury Inflation-Protected Securities' breakeven inflation rate, which briefly slipped below 2% last week, was last at 2.024%, indicating the market expects inflation to average more than 2% a year for the next decade, above the current pace of inflation.
02 Feb 2021

US Treasury yields slipped on Monday, pushed down by expectations of lower borrowing to fund economic stimulus measures and data that showed factory activity slowed last month.

The benchmark 10-year yield was last down 2.5 basis points at 1.0689%. The two-year yield, typically an indication of interest rate expectations, was last at 0.1113% and traded as low as 0.107%, just above its all-time low of 0.105% reached in May.

The US Treasury Department said it plans to borrow $274 billion in the first quarter, significantly less than the November estimate of $1.127 trillion, with the decline due to the department's higher cash balance at the beginning of January.

For the second quarter, the Treasury said it plans to issue $95 billion in net marketable debt, assuming an end-June cash balance of $500 billion. The estimates do not include assumptions for any future stimulus measures that may be enacted into law with the Treasury warning that actual borrowing could exceed the estimates as a result.

"The thing that jumps out at me the most is that these projections seem to indicate that the Treasury plans to finance some of its spending by drawing down this very huge cash balance that has built up," said Nancy Vanden Houten, lead economist at Oxford Economics, noting the balance totals $1.6 trillion based on the latest data.

On Wednesday, the Treasury will announce refunding details, with analysts expecting anticipated auction sizes for each maturity of notes and bonds to remain steady given the large balance that can be tapped.

Democratic President Joe Biden was set to meet later on Monday with 10 moderate Republican US Senators, who proposed shrinking his proposed $1.9 trillion package to aid the coronavirus-battered economy to $618 billion.

"There's less expectation of a grander stimulus package, which is limiting expectations for Treasury supply" and lowering yields, said Jim Barnes, director of fixed income for Bryn Mawr Trust.

Meanwhile, US manufacturing activity slowed slightly in January, with the Institute for Supply Management (ISM) reporting its manufacturing sector activity index fell to a reading of 58.7 from 60.5 in December.

"The fact that underwhelmed a bit sort of limited the selling pressure that there was a bit of earlier today, starting overnight," said Ben Jeffery a strategist at BMO Capital Markets.

ISM's measure of prices paid by factories for raw materials and other inputs jumped to its highest level in nearly 10 years, strengthening expectations inflation will perk up this year.

The 10-year Treasury Inflation-Protected Securities' breakeven inflation rate, which briefly slipped below 2% last week, was last at 2.024%, indicating the market expects inflation to average more than 2% a year for the next decade, above the current pace of inflation.

In the short-term market, the US overnight repurchase agreement or repo rate on Monday rose to 0.13% after plunging to 0.03% on Thursday, the lowest since May 2020.

A closely watched part of the yield curve measuring the gap between yields on two- and 10-year Treasury notes was last up less than a basis point at 96.27 basis points.