US Treasuries: debt ceiling, GDP and PCE figures in focus.
Ten-year Treasury yields have broken above 1.4% and sustained trading above this level for the first time since June. They happen to be in a fast area which seems to be leading them quickly above 1.5%. Things are moving fast today, with yields rising across the yield curve. Ten-year yields broke briefly above 1.5% following US durable goods orders data, exceeding expectations by more than double. Five-year yields are flirting with their 1% resistance, a level that they haven't crossed since March 2020. If they break above this level, they enter a fast area that could take them quickly to 1.2%. Lastly, 30-year yields are testing resistance at 2%. Yet, yields have the potential to slow down their rise as economic data might confirm a deceleration in growth on Thursday, putting a cap on yields.
As we enter October, a topic becoming more and more relevant to US Treasuries is the debt ceiling. Congress is struggling to find bipartisan support to raise the debt ceiling. The US Treasury secretary, Janet Yellen, warned that if an agreement is not reached, the country will run the risk of defaulting on its own debt by the end of October. We exclude the government will accept a default, forcing Democrats to extend the debt ceiling under their partisan multi-trillion-dollar tax and spending plan. However, the later such an extension arrives, the more profound implications for the bond market. To refinance existing maturing debt, the US Treasury needs to sell large volumes of T-Bills in a short period, provoking what can be called Quantitative Tightening (QT). Despite the RRP facility continues to hit new records signaling that liquidity in the money market is unusually high, a sudden large increase of T-Bill issuance can be difficult to digest even for a yield-hungry money market, leading to a bear flattening of the yield curve.
However, the long part of the US yield curve is more likely to be volatile than the front end this week as the market will focus on inflation and growth. On Thursday, GDP figures might show that the economic rebound has been slower than expected at the beginning of the year despite four consecutive quarters of expansion. Additionally, the Evergrande fallout poses a threat to global growth. Thus, GPD data might underpin US Treasury yields ahead of Friday' PCE deflator. Consensus expects prices to have stabilized in August and the PCE Deflator to rise slower than July, keeping the year-over-year figure flat at 4.2%. Investors will be looking at signals of whether inflation might be transitory or not, especially in light of recurrent supply chain disruptions as well as high energy prices. A strong PCE number might lead the Federal Reserve to a more aggressive tapering, especially if there are signs of persistent inflation. At that point, the market will need to consider earlier interest rate hikes leading to a bear steepening of the yield curve.
Bond auctions are also pivotal this week, with the US Treasury issuing 2-year and 5-year notes today and 7-year notes tomorrow. Investors will closely watch tomorrow's 7-year auction as in February, it sparked a widespread selloff due to lack of demand. We expect demand to be solid; however, it's critical to understand whether investors' appetite for US Treasuries is decreasing now that yields are moving higher.