Treasury Yields Surge Amid Tepid Auction Demand and Upbeat Economic Data

Market Overview:

  • Treasury Yields Rise: Treasury yields increased across the curve, with longer-dated maturities climbing over six basis points.

  • Weak Auction Demand: Two US government-debt auctions received tepid demand, leaving dealers holding more paper than usual.

Key Auction Details:

  • Five-Year Notes: $70 billion sold at a yield of 4.553%, slightly above the pre-auction level of 4.54%. Dealers held nearly 20% of the auction, higher than the recent average of 16.5%.

  • Two-Year Notes: $69 billion sold at a yield of 4.917%, above the pre-auction level of 4.907%. Dealers took around 17% of the auction, marginally above the recent average.

Economic Data and Fed Signals:

  • Consumer Confidence: May consumer confidence unexpectedly rose, marking the first increase in four months.

  • Hawkish Fed Signals: Minneapolis Fed President Neel Kashkari indicated that further rate hikes have not been entirely ruled out, reinforcing expectations that rates will remain higher for longer.

Market Reactions:

  • Longer-Dated Yields: The 30-year yield increased by seven basis points to 4.64%.

  • Two-Year Note: It remains near the upper end of the month's 4.7% to 5.03% range, with traders pricing at a nearly 80% chance of a rate cut in November.

Upcoming Events:

  • New York Fed President Speech: John Williams will speak at the Economic Club of New York on Thursday.

  • Seven-Year Note Auction: Scheduled for Wednesday, concluding this week's coupon auction calendar.

  • Key Economic Releases:

    • PCE Index: Expected to show an annual increase of 2.7% for April, the same as March.

    • GDP Update: First-quarter GDP data, including a price index measure, will be released on Thursday.

Analyst Insights:

  • Gregory Faranello (AmeriVet Securities) Highlighted the challenge of "thinner markets" post-holiday and noted better marginal data.

  • John Brady (RJ O'Brien): Pointed out the "heavy dealer takedown" and lighter bid-to-cover for both auctions.

  • George Catrambone (DWS Americas): Mentioned the mixed seasonal performance of May auctions and emphasised the importance of GDP and PCE data for near-term bond market direction.

Overall, the combination of weak auction demand, stronger-than-expected economic data, and hawkish Fed commentary is driving Treasury yields higher, reflecting the market's adjustment to the evolving economic and monetary policy landscape.

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