US Treasury yields stabilise, but investors still wary
An upside surprise by Feb consumer prices could bolster view that higher nominal yields are required
San Francisco
US TREASURY yields have stabilised for now, but traders are sleeping with one eye open.
Potential catalysts for another leg up - after 10- and 30-year yields reached the highest levels in more than a year - include inflation data in the form of February consumer prices on Wednesday, and a series of Treasury auctions beginning on Tuesday. A poorly bid auction of seven-year notes on Feb 25 unleashed the latest phase of the sell-off.
With market-based inflation expectations, derived from yields on inflation-protected Treasuries, near levels last seen in 2014, an upside surprise by February consumer prices could bolster the view that higher nominal yields are required.
Weak demand for the 10-year note auction later the same day or for the 30-year bond sale the next day would suggest that Treasury supply remains a problem even though auction sizes increases have paused.
The dramatic repricing of Treasury yields reflects improving expectations for the US economy tied to vaccine rollout and fiscal stimulus. Many say it isn't over yet and expect the 10-year yield - hovering around 1.60 per cent on Monday - to reach 2 per cent, though there are of course risks to that scenario.
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One is that tighter financial conditions embodied in higher yields spark a stock-market sell-off. Meanwhile, Federal Reserve officials are in their self-imposed quiet period ahead of their March 16-17 policy meeting.
BNP Paribas is among the banks forecasting the 10-year yield will reach 2 per cent by year-end, but "absolutely there's a risk that this could happen much quicker," said Shahid Ladha, head of G-10 rates strategy at the bank.
"Everything seems to be pointing to a faster pace and bigger magnitude of repricing because the reopening of the US economy and fiscal impulse are surprising to the upside."
A further rise in yields is likely to be led by intermediate maturities, reflecting increased expectations for an earlier start to Fed rate hikes, and flattening the yield curve between the five-year and the 30-year points, Mr Ladha says.
Traders are increasingly setting short bets in futures on the US$21 trillion Treasuries market.
And while auctions sometimes are used as opportunities to cover, volatility may curb the appetite to do so - resulting in more messy auctions at a time when dealer balance sheets are already bloated with Treasuries. BLOOMBERG
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