Bond auction update: CPI numbers don’t move bonds, but weak demand leaves US Treasuries volatile
Senior Fixed Income Strategist
Summary: Although today's surprise in CPI figures was priced in US Treasuries, we believe that demand for the US safe-havens remains weak, exposing investors to selloff risk. Everything points to a smooth 30-year US Treasury auction today. However, there is a chance to see a selloff in Treasuries if the bid-to-cover ratio is below 2.1x. We expect an uptick in demand only when 10-year yields rise to 2%. In the meantime, Italy saw solid demand for 3- and 15-year bonds, indicating that investors are ready for more and longer BTPS issuances. The 50-year Gilts reopening in the UK was successful. Still, bidding metrics were weaker than February despite the higher yield offered, indicating that investors are wary of duration.
Today's CPI numbers surprised at 2.6% YoY versus 2.5% expected. The move was fully priced in the bond market; thus, volatility was contained, paving the way for a smooth 30-year auction. Yet, we believe that yesterday’s 3- and 10-year bond auctions have highlighted a problem: demand for US Treasury remains weak. Indeed, both bonds' bid-to-cover ratio and foreign bids were below their one-year averages. It means that the market is still on hedge and that investors are ready to dump US Treasuries amid any surprise.
All in all, the auction results are depressive news for bond bulls, especially for those holding bonds with high duration. Hence, we believe there is still the possibility that today's 30-year US Treasury auction could go south.
Following are today's 30-year auction possible scenarios:
- “Apocalypse now”: bid-to-cover below 2.1x, the lowest since 2018. It can trigger a deep selloff in US Treasuries that will push 10-year yields to test 1.75%
- “Chill out”: bid-to-cover between 2.1x and 2.30x showing that the music is not stopping, but bond investors remain nervous, waiting for another day to dump US Treasuries
The latter looks likely today. However, it's imperative to accept that an apocalyptic scenario is doomed to happen as economic and inflation pressures accelerate. We expect that the 10-year yield will hit 2% by summer. Only then US Treasury will find real support from foreign investors.
Demand for Italian BTPS remains solid. Are we going to see new ultras?
In the old continent, we saw Italy issuing 3-, 5- and 15-year BTPS this morning. Despite last week Draghi announced that the country would increase its debt by EUR 40 billion, demand for BTPS was solid with a bid-to-cover ratio slightly below the 5-year average. Additionally, the Italian Treasury issued almost double the amount of 15-year bonds it did in December, without hiccups.
The auction results strengthen our view that Italy continues to be in a position of strength and that the market could easily digest any issuance of Italian ultra-long debt beyond 50-years.
Although Italian government bond yields remain a couple of basis points higher on the day, BTPS are still Europe's best-performing government bonds. Today, 15-year BTPS yields rose to the highest level since October 2020, widening just 20 basis points since the beginning of the year. Comparatively, French 15-year bond yields rose 50 basis points year to date.
Positive sentiment in Italian government bonds can be explained by the entrance of Draghi in the country's politics and by the higher yield that they provide compared to peers.
Appetite for ultras is tested by 2071 Gilts reopening
The United Kingdom reopened the 50-year bond issuance with 2071 maturity amid good demand from long-term real money investors. Bidding metrics were solid but below the auction of February the 2nd, which saw the Debt Management Office issuing the same Gilts at 0.74% in yield. Today, the same bonds were sold with a yield of 1.11%. It shows that despite Gilts offer higher yields compared to a few months back; investors remain wary of duration amid rising yields in the United States.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.