Starting today, tomorrow and Thursday, the US Treasury will hold a total of $120bn auctions of government bonds in the 3-year, 10-year, and 30-year tenors.
All eyes will be on the bid-to-cover ratios after a recent 7-year auction saw that ratio slump. If markets’ appetite for US government debt at these levels disappoints, Jeffrey Halley, senior market analyst at OANDA, expects “more equity market carnage for a start,” and US Dollar strength.
“Although the US Treasury already has the balances available to start disbursing the $1.90 trillion Biden stimulus, the government was already running eye-watering deficits anyway. A trillion dollars per annum in the latter half of the Trump term,” he told City A.M. this morning.
“So even setting stimulus packages aside, the US government has an impressive underlying borrowing appetite,” Halley noted.
Once President Biden signs of on the latest stimulus package, probably this week, the talk will turn to his $3 trillion remake America New Deal.
“Even the mere thought it could happen is likely to have inflationistas breaking into a cold sweat in the current environment,” Halley continued.
With markets on edge, a soft bid-to-cover ratio at the auctions this week, either singly or as a whole, is going to spark another inflationary rush for the exit door on selective asset classes.
Asia this morning
The direct correlation to the US bond market for everything is there to see in Asia today. US 10-year futures have rallied ever so slightly, with yields lower, and the EUR/USD and GBP have perked up, while gold has rallied modestly.
Base metals and oil have risen, although “they are probably going to no matter what,” Halley commented.
With the focus on the US bond market, some Asian data has slipped in under the radar this morning. Japan GDP for Q4 and household spending for January did what Japanese data does best, disappoint.
“That may leave the Bank of Japan with a quandary at next week’s policy meeting regarding whether to tolerate higher JGB yields. My guess is the answer will be no,” Halley said.
Moreover, Chinese state funds have reportedly intervened on the CSI 300 this morning, buying stocks and reversing their earlier 3.0 per cent losses. The CSI 300 broke below its multi-month uptrend support yesterday, as well as its 100-day moving average.
Yesterday, there was a lot of volatility in the markets. News of the enormous spending programme in the US, which includes $1,400 stimulus cheques, pushed up the US 10-year yield above the 1.6 per cent mark, it subsequently pulled back.
The aggressive moves witnessed in stock markets recently have been as a result of bond yields – the upward move suggests we are in for higher growth and inflation but it is the latter that generated selling pressure on equities, according to David Madden, market analyst at CMC Markets UK.
“Firmer yields can be a precursor to higher interest rates but the Federal Reserve are nowhere near thinking about tightening their policy,” he explained to City A.M. this morning
US Treasury Secretary Janet Yellen announced the stimulus scheme will be enough to boost the labour market, at the same time she is not too concerned about inflation.
In Europe, Germany’s DAX outperformed, it surged 3.3 per cent, as Deutsche Bank shares gained over 4 per cent following the news it will resume its dividend policy as well as begin a €1bn share buyback scheme. The FTSE 100 rallied 1.3 per cent as recovery hopes circulated.
Brent crude oil traded above $70 per barrel yesterday – setting a 14 month high – as a Saudi Arabian oil site came under attack from the Houthi movement in Yemen.
“Fears about supply being curtailed sent energy prices higher but prices retreated when it was confirmed there was no damaged inflicted,” Madden said.