Tough year for Treasuries ends with US$131 billion auction blitz

New York

A LAST wave of Treasuries issuance for 2018 will test the bond market's mettle this week, with a partial government shutdown and questions over the fate of Federal Reserve chairman already rattling investors.

Traders gearing up for holiday feasts this week will have even more to digest than usual, with the largest sales of two-, five- and seven-year securities since the 2010 book-ending Christmas Day. Add in a floating-rate note reopening, and investors are looking at US$131 billion of coupon-bearing debt auctions to close out 2018. US marketable debt outstanding climbed almost US$1.1 trillion in the 11 months through November - the most in six years - to US$15.6 trillion.

While bond bulls have recaptured the momentum in recent weeks amid signs that global growth is set to slow, much of 2018 was a decidedly downbeat year for US government debt overall. The selloff has been driven in no small part by the increase in supply to fund the widening budget deficit, according to Justin Hoogendoorn, head of fixed-income strategy at Piper Jaffray & Co. Two-year yields have climbed 76 basis points, 10-year yields are up 38 basis points, and the Bloomberg Barclays US Treasury Total Return index has gained just 0.32 per cent year-to-date, putting it on track for its worst performance since 2013.

"Until four to six weeks ago, it really looked like we were going to have negative returns," Mr Hoogendoorn said from Chicago. "Higher Treasury issuance played a significant role in pushing rates up, in addition to Fed policy."

Of course that Fed policy - which has seen the central bank lift its benchmark four times in 2018 - is likely to continue affecting the bond market, in particular because it has spurred speculation about US President Donald Trump's stance towards the central bank.

But looking beyond that - and the issues surrounding the shutdown - auctions are likely to be the most notable scheduled events in a week that's otherwise filled with a number of holiday closures and largely devoid of market-moving data.

Focus will be on Washington to see if lawmakers can reach an agreement to reopen those parts of the federal government that have been shut down, and also to assess the Trump administration's stance toward the Fed. In terms of scheduled events, Treasury auctions and housing-market data will be the highlights, sandwiched around the Christmas Day holiday. Bond traders also have an early close on Monday to look forward to. BLOOMBERG