U.S. Treasury yields are stable going into 20-year T-bond auction
U.S. Treasury yields are stable going into 20-year T-bond auction — The Treasury this week keeps up its deluge of debt supply by selling $24 billion of 20-year T-bonds today and $18 billion of 5-year TIPS on Thursday. Today’s auction will be the second and final reopening of the 1-7/8% 20-year bond of February 2041 that the Treasury first sold in February. Today’s 20-year T-bond issue was trading at 2.15% in when-issued trading late yesterday afternoon.
10-year T-note prices have recovered modestly in the past 2-1/2 weeks after the plunge seen in the previous six months. T-note prices fell sharply beginning in late 2020 as news of vaccines led to hopes for an eventual end to the pandemic. Vaccinations began in December and ramped up early this year. Currently, 26% of the U.S. population has been fully vaccinated, and 40% have received at least one vaccination dose.
T-note prices accelerated lower in January when Democrats swept control of Washington and promised huge fiscal stimulus measures. After Democrats took control of Washington in January, they got to work on a $1.9 trillion pandemic aid bill that was signed into law in early March. The U.S. economy is currently benefiting from about $5 trillion of pandemic aid bills, including the first $2.2 trillion bill in March 2020, December’s $900 billion bill, and March’s $1.9 trillion bill.
Even more stimulus is on the way. The Biden administration has proposed a $2.25 trillion infrastructure bill with spending over 8 years. That bill is expected to be signed into law by this summer or early autumn. The Biden administration, in the next few weeks, is due to announce its second package that focuses on social spending.
That massive amount of fiscal stimulus is kicking the U.S. economy into high gear. The consensus is for U.S. GDP this year to soar by +6.2%, easily overcoming last year’s pandemic-induced -3.5% decline.
Expectations for the economy to soar this year have led to a sharp increase in inflation expectations. The 10-year breakeven inflation expectations rate rose very sharply by +63 bp from 1.70% in November 2020 to the current level of 2.33%, which is only 5 bp below the late-March 7-3/4 year high of 2.38%. The sharp increase in inflation expectations has been a major bearish factor for T-note prices.
The massive amount of new Treasury debt has also been a major bearish factor over the past year. The U.S. national debt has soared by $4.8 trillion (+36%) from the pre-pandemic level to the current record high of $28.1 trillion. The U.S. national debt has now more than tripled in the past 14 years from the $8 trillion level seen before the 2007/09 Great Recession.
Despite all those bearish factors, T-note prices in April recovered modestly after the market seemed to have discounted all the bearish news and some short-covering emerged. The 10-year T-note yield has eased to the current level of 1.56% from the late-March 1-1/4 year high of 1.77%.
T-note prices are currently seeing support from the resurgence of the global pandemic, which will delay a full recovery of the global economy. T-notes are also seeing support from expectations for the Fed to continue its QE program for a number of months and maintain near-zero interest rates until at least 2023.
Fed officials in recent weeks have made a concerted effort to sound dovish and reassure the markets that any Fed tightening is a long way off. Fed Chair Powell last week said that the Fed will not consider tapering its QE program until “we’ve made substantial further progress towards our goals” on inflation and employment.
The Fed wants to push inflation sustainably above 2% and wants the unemployment rate to drop back down near pre-pandemic levels. The U.S. economy still needs to recover another 8.4 million jobs before getting back to pre-pandemic job levels.
Mr. Powell said that QE tapering would “in all likelihood be before, well before, the time we consider raising interest rates.” Mr. Powell noted that the consensus among FOMC members is that the funds rate will remain at its current near-zero rate at least through the end of 2023.
However, the markets have a more hawkish view and are expecting the Fed’s first +25 bp rate hike by late 2022 or early 2023. The markets are expecting an overall +250 bp rate hike to 2.5% by late 2027.
T-note prices are currently seeing a respite due to the resurgence of the pandemic in many parts of the world. However, T-note prices are likely to remain on the defensive as the year wears on due to the expected strength in the U.S. economy, a rise in the inflation statistics, and Washington’s next round of stimulus spending. In addition, the fast vaccination rate means that the pandemic in the U.S. should be down to minimal levels by the end of this year, depending on how many people get vaccinated.
The current 10-year T-note yield of 1.56% is still very low from a historical perspective. The 10-year T-note yield is 36 bp below the end-2019 level of 1.92% seen before the pandemic. The current T-note yield of 1.56% is half the 3.00% level seen as recently as late 2018. The current low level of the 10-year yield means there is plenty of room for an upside move in yields in coming months and years as the global economy normalizes after the worst pandemic in a century.
