Treasury Market in Tumult Stares Down $340 Billion More Debt
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Bond investors are looking for orientation points this week in a fog of panic that’s paralyzed parts of the world’s biggest and safest debt market.
Roughly $340 billion of Treasuries are on the way. That burst of supply could help a market starved of high-quality securities if it lands in less chaotic conditions. But there’s hardly any guarantee of that: The 10-year yield, a benchmark for global borrowing costs, swung in a range of more than 50 basis points in each of the past three weeks, a phenomenon that hasn’t been seen in the past two decades. Rates-market volatility is not far below a post-2009 high reached this month, and illiquidity still reigns, as seen in shrinking futures open interest.
The days ahead are unlikely to bring much in the way of settling news. Yields pitched lower Friday as more governors ordered residents to stay home to curb the spread of the coronavirus. And investors are also braced for data that will help them piece together the economic fallout. Forecasts for the coming quarters are alarming — Goldman Sachs Group Inc. sees a “sudden stop for the U.S. economy” that will cause an unprecedented 24% contraction in annualized growth next quarter.
“The market is stuck not just because of general illiquidity, the market is stuck because people want to trade on macro fundamentals, and those are still very, very difficult to define right now,” said Seth Carpenter, an economist at UBS and a former Treasury official.
The picture taking shape is one of a rapidly crumbling U.S. economy. Reports on both manufacturing and services are expected to show contraction in March. Thursday brings jobless claims, which are forecast to have more than quadrupled from the previous week to a record above 1 million.
The market’s reaction will be a useful gauge of how much damage traders have already priced into rates, said Lauren Goodwin, an economist and multi-asset strategist at New York Life Investments.
The 10-year Treasury yields 0.85%, after tumbling about 30 basis points Friday in its biggest one-day decline since 2009. It’s still up from a record low of 0.31% set March 9 as global governments pledged trillions of dollars of economic stimulus, and as some investors unloaded even the safest assets to generate cash.
One consolation for investors coming into this week is that central banks have pulled out all the stops. The Federal Reserve has rolled out a series of actions to help stave off a liquidity crisis. Just since last Sunday, its steps include slashing interest rates to near-zero, injecting billions of dollars into funding markets, purchasing $272 billion of Treasuries and reviving a string of crisis-era programs to help companies and banks get cash.
Goodwin doesn’t doubt the ability of monetary authorities to keep funds flowing through the financial system. But she’s concerned the volatility that’s caused a stampede out of corporate bond markets could trigger insolvencies.
“Central banks have signaled very strongly that they are all in,” she said. “The Fed is trying to heal the central nervous system of the market, but the crisis didn’t start there, the crisis started in the real economy because of this shutdown.”
That’s why all eyes are on U.S. lawmakers, with investors looking toward a potential vote this week on a much-anticipated economic rescue package.
“One of the biggest calming impacts on the markets will come from the fiscal policy side,” Goodwin said.
What to Watch
- Lawmakers take the spotlight, with a vote looming on a promised spending package. And the push and pull of Treasury auctions and Fed purchases will keep traders busy.
- Here’s the economic calendar:
- March 23: Chicago Fed national activity index
- March 24: Markit U.S. manufacturing, services, composite PMI surveys; new home sales; Richmond Fed manufacturing index
- March 25: MBA mortgage applications; durable, capital goods orders; FHFA house price index
- March 26: Advance goods trade balance; wholesale, retail inventories; GDP; core PCE; jobless claims; Bloomberg consumer comfort; Kansas City Fed manufacturing activity
- March 27: Personal income and spending; PCE deflator; University of Michigan sentiment survey
- March 23: $45b of 13-week bills; $39b of 26-week bills
- March 24: $26b of 52-week bills; $40b of 2-year notes
- March 25: $18b of 2-year floating-rate notes reopening; $41b of 5-year notes
- March 26: 4- and 8-week bills (last week totaled $100 billion combined); $32b of 7-year notes
— With assistance by Elizabeth Stanton
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