The selloff in US Treasuries is not over yet. However, we might see some consolidation as corporate pension funds allocate capital into bonds before the end of the fiscal year. The communication problem between the Federal Reserve and the bond market leaves US Treasuries extremely volatile, especially if inflation proves to be on the rise. This is why every economic release, auction and Federal Reserve member’s speech this week can be a catalyst for a deeper selloff in Treasuries. Today Powell will speak at the Bank of International Settlements, and he will testify before Congress on Tuesday and Wednesday. Beyond Powell, there are a dozen other Federal Reserve's members speaking this week, which might give clues regarding their feeling concerning inflation and the bond market turmoil.
The market struggles to agree with the Fed's dot plot, which doesn’t see interest rates hikes until 2023. Hence, it takes monetary policy into its hands by dumping Treasuries. The central bank's problem is that if nominal yields rise too much, they might hinder the negative interest rates policy that the Federal Reserve has been committed to since January last year, forcing the Fed’s hand to cap long term yields.
In terms of technical analysis, 10-year Treasuries are trading in a fast area, meaning that either they continue to rise towards 2% or they might test their support line at 1.65%. Bearish and bullish sentiment can arise from any Federal Reserve speaker, Treasury bond auctions and inflation data. The US Treasury will issue 2- and 3-year notes during the next couple of days, but it will be on Thursday that the focus will turn on the 7-year note auction which last month attracted the lowest demand since 2009, with foreign investors’ bids plunging the most since 2014. A repeat of the same could spark even a deeper selloff, with yields rising fast towards the very pivotal level of 2%. This time around, demand could be supported by corporate pension funds allocating capital into bonds before the end of the fiscal year, especially now that US Treasuries offer a more competitive yield than other sovereigns (to learn more, click here).