- ECB expected to try to dampen bond yields
- Biden speech expected tonight and pandemic-bill signature on Friday
- 30-year T-bond auction to yield near 2.24%
- U.S. unemployment claims expected to show labor market improvement
- U.S. JOLTS job openings expected to improve
ECB expected to try to dampen bond yields — The ECB at its policy meeting today is expected to leave its key variables unchanged. The markets are mainly waiting to see how hard ECB President Lagarde pushes back against the recent rise in European bond yields.
ECB officials in recent weeks have been trying to talk bond yields lower and have threatened to boost QE buying to enforce their talk. However, the ECB, in the past two weeks, has not put its money where its mouth is and has not boosted its weekly QE buying. The ECB has the flexibility to adjust its weekly QE buying within the scope of its two QE programs.
European bond yields in recent weeks have moved higher, mainly because of the sharp rise in U.S. T-note yields. However, European yields have less reason to rise than U.S. yields because (1) the pandemic situation is worse in Europe due to continued shutdowns and a slow vaccination pace, and (2) the U.S. is spending far more fiscal stimulus money than Europe. The 10-year T-note yield is up by +62 bp on the year at 1.53%, whereas the 10-year bund yield is up by only +26 bp on the year at -0.31%. Still, ECB officials are not happy with even that +26 bp rise.
Biden speech expected tonight and pandemic-bill signature on Friday — The House yesterday approved the pandemic aid bill, sending it to White House. White House officials indicated that President Biden will sign the bill on Friday. That would be just in time to prevent Sunday’s expiration of extra unemployment benefits.
President Biden is expected to deliver a speech this evening on the pandemic. In that speech, he may give some details about his plan for a new infrastructure stimulus bill.
The Biden administration has yet to decide how to push its legislative priorities in coming weeks. It appears that the White House may first try for an infrastructure bill that can gain bipartisan support. However, if that bipartisan support is not forthcoming, then the Administration will be forced to pivot to another budget reconciliation bill. At that point, Democrats will start loading every legislative priority they can fit into that bill, since any other initiatives would likely be shot down by the Republican filibuster in the Senate.
The markets will be carefully watching how the next spending bill takes shape since there are likely to be some tax hikes to offset the cost of the bill. Mr. Biden already said during the campaign that he favors raising the corporate tax and the capital gains tax. Regarding income taxes, however, he repeatedly promised not to raise taxes on households making less than $400,000.
30-year T-bond auction to yield near 2.24% — The Treasury today will conclude this week’s $120 billion coupon package by selling $24 billion of 30-year T-bonds. Today’s auction will be the first of two reopenings of the 1-7/8% 30-year bond of February 2051, which the Treasury first sold last month.
The markets are nervous about demand for today’s 30-year T-bond auction. The high duration of the 30-year bond means it has the highest downside price risk compared with shorter-term Treasury securities in the current environment of rising interest rates. Demand was tepid for yesterday’s 10-year T-note auction, but the market didn’t panic. That was in contrast to auction day on February 25, when Treasury yields spiked higher after a disastrous showing for the 7-year T-note auction.
The benchmark 30-year T-bond yield yesterday closed little changed at 2.24%. The 30-year T-bond yield has fallen by -15 bp from the late-Feb 14-month high of 2.39%, but is still up by +60 bp on the year from the end-2020 level of 1.64%.
The 12-auction averages for the 30-year are as follows: 2.33 bid cover ratio, $5 million in non-competitive bids, 6.1 bp tail to the median yield, 84.1 bp tail to the low yield, and 52% taken at the high yield. The 30-year is well above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 64.8% of the last twelve 30-year T-bond auctions, which is well above the median of 61.6% for all recent Treasury coupon auctions.
U.S. unemployment claims expected to show labor market improvement — Today’s weekly U.S. unemployment claims report is expected to show continued, slow progress for the U.S. labor market. The sharp drop in Covid infection rates in the past two months has boosted business activity, which should lead to improved hiring in the coming weeks.
The consensus is for today’s weekly initial unemployment claims report to fall by -20,000 to 725,000, more than reversing last week’s gain of +9,000 to 745,000. Continuing claims are expected to drop -95,000 to 4.200 million, adding to last week’s -124,000 decline to 4.295 million.
However, there are still many more people on the unemployment rolls than before the pandemic. From February’s pre-pandemic levels, initial claims are still up by +528,000, and continuing claims are up by 2.6 million. Payrolls are still down by -9.5 million jobs from the pre-pandemic level.
U.S. JOLTS job openings expected to improve — The consensus is for today’s Jan JOLTS job openings report to show a small increase of +4,000 to 6.650 million, adding to Dec’s increase of +74,000 to 6.646 million. The JOLTS series has recovered much of last year’s pandemic plunge and would need to rise by only another +366,000 to match last January’s pre-pandemic level of 7.012 million.
