NEW YORK: Ahead of auctions of $162 billion in new issues, Treasury bond yields recovered on Monday morning after falling earlier in step with U.S. stocks as the trade war with China hit corporate earnings from Caterpillar Inc and fourth-quarter guidance from Nvidia Corp.
Treasury yields are expected to rise further ahead of Monday's auctions. The U.S. government will sell $81 billion in short-dated bills, $40 billion of two-year notes and $41 billion of five-year notes. An additional $78 billion will be sold on Tuesday.
Bond issuance has increased steadily since 2018 to fund President Donald Trump's tax cuts and spending increases. The latest flood of supply coincides with Federal Reserve Chair Jerome Powell signaling that the central bank may pause its gradual increases in interest rates after U.S. economic data came in softer-than-expected in December and volatile financial markets whipped investors around.
Not all market participants were concerned that the increased supply, alongside expectations of a Fed pause, would decrease demand. Bond yields increase with interest rates, with the two-year yield used as a proxy for market sentiment about interest rate hikes.
"Today's two-year supply will offer an update on primary market demand for Treasuries as Powell's pause gets underway," said Benjamin Jeffrey, trading products analyst at BMO Capital Markets. "While on an outright basis two-year yields are well off their cycle highs set late last year, within the context of this new, lower range, two-years look cheaper than they have for most of 2019."
The Dow Jones Industrial Average was down 302 points, or 1.22 percent and the S&P 500 Index fell 1.02 percent, down 27.2 points in mid-morning trade. A fall in riskier assets pushes money into safe havens such as U.S. government bonds, driving up prices and lowering yields.
Caterpillar reported quarterly profit that widely missed Wall Street estimates, hurt by softening demand in China, a strong dollar, and higher manufacturing and freight costs, sending shares tumbling around 8.7 percent.
Also on Monday morning, Nvidia announced it had cut its fourth-quarter revenue estimate by half a billion dollars due to weak demand for its gaming chips in China and lower-than-expected datacenter sales, sending its shares sliding 15.5 percent.
The benchmark 10-year yield was down half a basis point last at 2.75 percent, with the 30-year yield down a basis point at 3.05 percent. The two-year yield was up less than half a basis point, last at 2.60 percent.