Bond traders are keenly focused on demand for new Treasury notes and bonds this week, as the market navigates an environment devoid of official economic data due to the ongoing US government shutdown. This test of market appetite for new debt occurs as longer-dated yields have rebounded from recent yearly lows, with the 10-year Treasury yield recently fluctuating between 4.05 per cent and 4.16 per cent.
The US Treasury is scheduled to auction new three-year, 10-year, and 30-year debt this week. The total refunding amount will be $US125 billion, mirroring the level from May last year. This week, market participants have limited economic data to guide trading decisions, which puts even more focus on the auctions.
Last week, interest-rate swap contracts linked to the Federal Reserve’s December 9-10 meeting indicated a tendency towards a third quarter-point rate reduction. Market expectations anticipate rate cuts to approximately the 3 per cent level over the next year, influenced by sentiment suggesting weaker hiring trends. Chit Purani, portfolio manager at Capital Group, notes that current interest rates are fairly priced, with potential downside risks due to labour market uncertainties creating a positive risk-reward symmetry for interest rates. Capital Group favours owning intermediate and shorter maturity Treasuries (2-year to 5-year) that are more closely linked to the path for Fed funds. Capital Group is an investment management firm that provides a range of investment products and services. They manage assets for individuals and institutions globally.
