- Tech stocks come roaring back after T-note yields drop
- House expected to approve pandemic aid bill today
- 10-year T-note auction to yield near 0.53%
- CPI expected to begin moving higher
Tech stocks come roaring back after T-note yields drop — The Nasdaq 100 index (NDX) on Tuesday closed sharply higher by +4.03%. NDX on Tuesday came roaring back after the plunge seen in the past three weeks that culminated with last Friday’s 3-1/4 month low. NDX on last Friday’s low corrected lower by a total of -12.0% from the mid-February record high.
Tech stocks staged a come-back on Tuesday due to (1) the sharp -6 bp drop in the 10-year T-note yield to 1.53%, and (2) dip-buying of tech stocks by those who may have missed out during the 2020 pandemic surge.
There was also a sense that the overall stock rally still has legs considering that the Dow Jones Industrials just posted a record high on Monday, and the S&P 500 index needs to rally by only another +1.9% to match its mid-February record high. That theory was promoted by ARK founder Cathie Wood in a widely-discussed interview on Monday. She said that the recent stock market action indicates that the stock market rally is broadening out to include value and cyclical stocks, implying that her tech-stock favorites are only temporarily correcting lower.
Tuesday’s global stock market session started on a negative note after China’s Shanghai Composite index plunged to a new 3-month low and closed the day -1.82%. The Shanghai Composite has now corrected lower by a total of -10.8% from its mid-Feb 5-1/2 year high.
The Chinese stock market has recently seen weakness due to concerns that Chinese authorities will start to tighten credit as the global economy improves with the fading pandemic. Chinese authorities remain very sensitive to very high Chinese debt levels and are eager to reduce leverage ratios as the global economy recovers.
The continued stock rout in Chinese stocks came despite reports of heavy stock buying by state-connected funds, also known as the “national team.” China’s political leaders are holding the National People’s Congress through this week, the most important political meeting of the year. China’s leaders typically try to keep the markets stable during political meetings. Chinese investors therefore became even more nervous when the stock rout continued on Tuesday despite the national team’s buying.
Later in the global trading day, the U.S. stock market was pleased by Tuesday’s -6 bp drop in the 10-year T-note yield to 1.53%, which was down by -9 bp from last Friday’s 1-year high of 1.62%. The 10-year T-note yield has soared by +62 bp this year from the end-2020 level of 0.91%.
T-note prices saw some short-covering on Tuesday after last week’s plunge. Also, there was some optimism sparked by the strong demand for Tuesday’s $58 billion 3-year T-note auction. That auction had a bid-cover ratio of 2.69, better than the 12-auction average of 2.40 and the highest in 2-3/4 years.
While demand was strong for yesterday’s shorter-term 3-year T-note maturity, it remains an open question whether that demand will extend to the longer-term maturities of today’s 10-year T-note auction and Thursday’s 30-year T-bond auction. The longer-term maturities have a higher duration and therefore show larger price drops when interest rates rise, making them a much riskier purchase in the current environment of rising interest rates.
House expected to approve pandemic aid bill today — The House this morning is expected to approve the revised pandemic aid bill passed by the Senate on Saturday. President Biden has said that he will sign the bill as soon as it arrives on his desk. That would allow Democrats to meet their self-imposed deadline of passing the bill before this Sunday (March 14), when some unemployment benefits expire. The White House has said that after President Biden signs the pandemic aid bill, he will announce the upcoming infrastructure stimulus bill, which is expected to contain a raft of other spending measures as well as possible tax increases.
10-year T-note auction to yield near 0.53% — The Treasury today will sell $38 billion of T-notes in the first of two reopenings of the 1-1/8% 10-year T-note of February 2031 that the Treasury first sold last month. The Treasury will then sell $24 billion of reopened 30-year T-bonds on Thursday, concluding this week’s $120 billion coupon package. Today’s 10-year T-note issue was trading at 1.53% in when-issued trading late yesterday afternoon.
The 12-auction averages for the 10-year are as follows: 2.42 bid cover ratio, $10 million in non-competitive bids, 5.4 bp tail to the median yield, 46.7 bp tail to the low yield, and 61% taken at the high yield. The 10-year is slightly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 61.1% of the last twelve 10-year T-note auctions, which is slightly below the median of 61.6% for all recent Treasury coupon auctions.
CPI expected to begin moving higher — Today’s Feb CPI is expected to rise to +1.7% y/y from Jan’s +1.4%, but remain below the Fed’s +2.0% inflation target. Meanwhile, the Feb core CPI is expected to be unchanged from Jan’s +1.4% y/y.
Over the next few months, the CPI figures are expected to move significantly higher due to the low year-earlier base seen during the worst of the pandemic shutdowns. The Fed has already said that it does not expect that surge to take root. Still, the Fed intends to push inflation above 2.0% so that inflation averages near 2.0%. The 10-year breakeven inflation expectations rate is currently at 2.22%.
