By Karen Pierog
CHICAGO (Reuters) – Demand for the US Treasury will be tested this week as $ 183 billion in bonds will be auctioned off, with a seven-year bond sale likely to be closely watched. closely after an auction that futures occurred last month.
The US Treasury Department significantly increased debt issuance last year to fund stimulus measures to combat the economic slowdown caused by the coronavirus pandemic. Issuance volume by 2021 is expected to increase to $ 4 trillion, according to ING.
The increase in supply, coupled with the Federal Reserve’s pledge to keep monetary policy loose while economic growth and inflation increase, have contributed to the increase in treasury bond yields. Investors will also focus on Fed Chairman Jerome Powell on Tuesday, who is expected to be answered by questions at congressional hearings https://www.federalreserve.gov/newsevents/testimony /powell20210323a.htm about potential risks from the Fed hearing. Easy policy including its bond buying scheme.
Last week, the benchmark, reaching 1,754%, the highest level in 14 months. It trades around 1.68% on Monday.
The Treasury will sell $ 60 billion of 2-year bonds on Tuesday, $ 61 billion of 5-year bonds on Wednesday, and $ 62 billion of 7-year bonds on Thursday.
“I think there’s good reason to be optimistic for this week’s auctions,” said John Canavan, lead analyst at Oxford Economics.
He said the $ 62 billion 7-year bond auction on Feb. 25, resulting in the lowest demand rate for that maturity on record, was an exception and auctions for Another term has since gone “pretty well”.
The $ 24 billion 20-year bond auction last week saw a fierce bidding, with a bid-to-bid ratio, the demand assessment standard, of 2.51-1, compared with a February auction that resulted in a 2.15-1 ratio, the lowest since maturity was relaunched in May 2020.
Canavan also points to an expected increase in foreign demand and a growing inflow of taxable government bond funds, citing Investment Company Institute data with cash flows continuing to be supported. by the taxpayer cash stimulus investment.
“Investment fund demand and foreign demand, which are the two main drivers of auctions, have so far largely caught up with the increasing scale of the auction over the past year,” he said. “Even if hedge fund demand starts to stabilize, it just means that while (the bid-to-cover ratio) won’t be too high, they will still be very strong.”
Zachary Griffiths, macro strategist at Wells Fargo (NYSE :), said while the auctions of 10-year and 20- and 30-year bonds this month are supposed to be quite successful, trading in the subsequent auction is at a low price. than.
“These auctions have become a liquid event and people are taking advantage of it, but you still see some difficulty in trading later, which shows that basic demand isn’t everything. “, he said.
He added that while yields are more attractive for 5 and 7-year tenors compared to a month ago, those auctions could be a bit more challenging than the second-term auctions. years, will probably work fine.