10-year T-note yield falls to 1-week low on Powell's inflation reassurances and German pandemic surge
U.S. durable goods orders expected to show another increase
5-year T-note auction to yield near 0.82%10-year T-note yield falls to 1-week low on Powell’s inflation reassurances and German pandemic surge — The 10-year T-note yield on Tuesday fell sharply to a 1-week low and closed the day -7 bp at 1.62%. The 10-year yield has now fallen by -13 bp from last Thursday’s 14-month high of 1.75%.
T-note yields fell Tuesday due to (1) Fed Chair Powell’s reassuring words on inflation, (2) Tuesday’s -2 bp drop in the 10-year breakeven rate on the -6% plunge in crude oil prices, (3) Germany’s announcement of a full lockdown over a 5-day period over the Easter holiday, and (4) solid demand for the 2-year T-note auction.
The stock market was pleased by Tuesday’s decline in the 10-year T-note yield, but moved lower anyway because of negative pandemic news and weakness in energy stocks with the -6% plunge in crude oil prices. The S&P 500 index on Tuesday closed down -0.76%, and the Nasdaq 100 index closed down -0.53%.
Germany on Monday announced that its lockdown would be extended for another month until April 18. German Chancellor Merkel on Tuesday then announced that Germany would go into a hard lockdown during the Easter holiday for five days starting April 1, when all stores will be closed except for food stores. Ms. Merkel said Germany is “in a very, very serious situation,” with Covid “case numbers rising exponentially and intensive-care beds filling up again.”
Europe is in worse shape on the pandemic front than the U.S. However, the sharp improvement seen in the U.S. pandemic statistics from mid-January through February has stalled, and infections are now moving a bit higher.
The 7-day average of new U.S. Covid infections fell to a 5-1/4 month low of 51,820 on March 14, but has since between moving sideways above that level in the range of about 53,000-54,000. Dr. Fauci has warned that infection levels could remain high due to the Covid variants and the fact that some areas are letting down their guard.
Fed Chair Powell on Tuesday delivered some soothing inflation comments in his CARES Act testimony. Mr. Powell admitted that inflation will move higher this year, saying “We do expect that inflation will move up over the course of this year.” His reasons for the expected inflation rise include a low year-earlier base, pent-up demand, and supply-chain bottlenecks.
However, Mr. Powell went on to say, “Our best view is that the effect on inflation will be neither particularly large nor persistent.” He added, “We have been living in a world of strong disinflationary pressures — around the world really — for a quarter of a century. We don’t think a one-time surge in spending leading to temporary price increases would disrupt that.”
In last week’s Summary of Economic Projections, the FOMC forecasted that PCE inflation will rise to +2.4% by late this year, but then ease to +2.0% by the end of 2022, right at the Fed’s target. The FOMC is forecasting that core PCE inflation will rise to +2.2% late this year and then ease to +2.0% by the end of 2022.
Fed Chair Powell and Treasury Secretary Yellen will testify again today on the quarterly pandemic-aid CARES Act report to Congress, this time to the Senate Banking Committee. Since the $2.2 trillion CARES Act was passed in March 2020, Washington has enacted two more massive aid packages, i.e., December’s $900 billion package and March’s $1.9 trillion package.
The markets are expecting the last two aid bills, totaling $2.8 trillion, to give the economy a very strong boost during the middle of this year. The consensus is for GDP growth of +6.9% in Q2 and +7.0% in Q3, leading to an overall 2021 growth rate of +5.6%. A +5.6% growth rate in 2021 would more than offset the -3.5% decline seen last year during the pandemic. The consensus is for continued strong GDP growth of +4.0% in 2022 but GDP growth is then expected to fall back to a more normal level of +2.4% in 2023.
U.S. durable goods orders expected to show another increase — The consensus is for today’s Feb durable goods orders report to show an increase of +0.6% and +0.5% ex-transportation, adding to Jan’s increases of +3.4% and +1.3%, respectively. Feb capital goods orders nondefense ex-aircraft, a proxy for capital spending, is expected to rise +0.5% m/m, adding to Jan’s increase of +0.4%.
5-year T-note auction to yield near 0.82% — The Treasury today will sell $26 billion of 2-year float-rate notes and $61 billion of 5-year T-notes. The 5-year T-note yield yesterday fell to a 3-session low and closed -5 bp at 0.82%, down by -8 bp from last Friday’s 9-month high of 0.90%.
The Treasury on Thursday will then conclude this week’s $209 bln T-note package by selling $62 bln of 7-year T-notes. The markets are nervous about Thursday’s 7-year T-note auction since last month’s 7-year auction on Feb 25 was a debacle that caused the 7-year T-note yield to surge by +19 bp in a single day and post what was then a 1-year high of 1.26%. However, the markets were less nervous about that auction yesterday after demand was solid for the 2-year auction and as the 7-year T-note yield fell by -7 bp.
The 12-auction averages for the 2-year are as follows: 2.45 bid cover ratio, 4.7 bp tail to the median yield, 22.2 bp tail to the low yield, and 39% taken at the high yield. The 5-year is mildly below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 59.3% of the last twelve 5-year T-note auctions, which is mildly below the median of 61.6% for all recent coupon auctions