Behind the noise of the US elections and a fiscal stimulus package, the bond market is giving meaningful signs that something is changing.
Trump’s tweets this week have eclipsed the 10-year, and 30-year Treasury auctions, which we believe have something to say amid the confusion created by the US election.
Ten year Treasuries on Wednesday priced in line with the auction's the pre-sale yield. However, demand was driven by indirect bidders while direct bidders' demand fell significantly. By the end of the day, the 10-year Treasury yield closed a couple of basis points higher than where it priced earlier in the day.
Demand at yesterday's 30-year Treasury reopening wasn't as strong as expected as the notes awarded a yield of 1.678% which is a basis point higher than pre-sale indications. Furthermore, the bid-to-cover, which is a measure of demand, was slightly weaker than the one of last month.
What is happening is that as Biden's polling lead over Trump grows, the market is adjusting inflation expectation. Indeed in the past few days, we have seen inflation indicators breaking meaningful levels.The 5-year 5-year forward inflation expectation has broken its resistance line, reaching levels previously seen last November: