Yields fall ahead of $40bn two-year note auction

23 Apr, 2019

NEW YORK: Treasury yields were lower on Tuesday morning, with big moves in the two-, five- and seven-year note yields ahead of the auctions of all three maturities this week.

The US government will sell $40 billion of two-year notes later on Tuesday. Although increased supply would theoretically drive prices lower, the two-year yield, which moves inversely to price, was down 2.7 basis points in mid-morning trade.

"Because yields have backed up so much, things look much more attractive now, even with the added supply," said Mary Ann Hurley, vice president, fixed income trading at D.A. Davidson.

Tuesday's move is a counter-trend in the broader move higher in yields in the last month. The two-year yield is a proxy for market expectations of interest rate hikes, which the Federal Reserve has indicated will be on hold for the near term in the wake of financial market volatility and softer economic data. But as the economic outlook has improved, yields have risen back from late-March lows.

Government bond auction sizes have ballooned since the start of 2018 as the United States takes on debt to pay for President Donald Trump's tax cuts. Treasury issuance is likely to remain high, given the large budget deficit, but for now, auctions are at or slightly below the record sizes set in 2018.

New debt supply was the primary mover of markets on Tuesday morning, said Hurley. There is little US economic data scheduled for release until first-quarter gross domestic product is reported on Friday. Investors also had little conviction as Australia, Hong Kong and much of Europe returned to trading desks after a holiday on Monday.

"Lots supply and low trading volume," characterized trading on Tuesday, said Hurley.

There was also a bid in five-year notes, which saw yields fall 3 basis points to 2.358 percent, and in seven-year notes, which also saw yields fall 3 basis points, last at 2.457 percent. The Treasury Department will auction off $41 billion five-year notes on Wednesday and $32 billion seven-year notes on Thursday.

More than a quarter of S&P 500 companies are scheduled to report earnings this week, including tech stocks Facebook Inc and Microsoft Corp. Thus far, corporate earnings have largely beat analyst expectations, which were low after interest-rate and recession risks roiled financial markets in January.

But stock indexes remained below record levels, which alongside increased demand for Treasury bonds, suggests investors were still waiting to see if results from major companies would ease concerns about an earnings recession.

Copyright Reuters, 2019

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