- March 10-year T-note prices post 2-3/4 month high on Republican agenda delay and lower oil prices
- 30-year T-bond auction to yield near 2.95%
- U.S. unemployment claims expected to remain favorable
March 10-year T-note prices post 2-3/4 month high on Republican agenda delay and lower oil prices — March 10-year T-note prices on Wednesday rallied to a 2-3/4 month high and the 10-year T-note yield fell to a new 3-week low of 2.32%. T-note prices have rallied in the past two weeks mainly because of the slow pace of the Republican policy agenda, which in turn has reduced inflation expectations and reduced expectations for Fed tightening.
The Dec 2018 federal funds futures contract (on a yield basis) so far this week has fallen very sharply by -12 bp to 1.48% from 1.60% last Friday. That means that the market this week has knocked down expectations for the overall 2017-18 Fed rate hike by 12 bp or about one-half of a 25 bp rate hike. By no coincidence, the 10-year T-note yield this week has fallen by a nearly identical -12 bp, illustrating how reduced Fed rate-hike expectations have been a key driver of this week’s decline in the 10-year T-note yield.
The 10-year T-note yield has also moved lower due to this week’s -7.5 bp decline in the 10-year breakeven inflation expectations rate. Inflation expectations have fallen this week due to the slow Republican policy agenda and this week’s -2.6% sell-off in crude oil prices. March WTI crude oil prices on Wednesday fell to a new 2-1/2 month low due to expectations for a steady increase in U.S. oil production combined with doubts about whether OPEC will extend its 1.2 million bpd production cut agreement when it expires in June.
T-note prices could continue to rally due to the delayed Republican policy agenda. The markets started this year with high hopes for quick Republican action on tax cuts and an infrastructure plan. Instead, the Republican Obamacare repeal-and-replace process has ground to a near halt and the House Republicans’ corporate tax plan has run into major opposition from a big chunk of corporate America that opposes a 20% tax on imports. President Trump himself alerted the markets to the slow policy progress when he said this past Sunday in his Fox news interview that the Obamacare repeal-and-replace process may last into next year.
While T-notes have been back-peddling, the U.S. stock market has so far been able to hold its post-election gains due to (1) the stronger U.S. economic data and stronger overseas economic growth, (2) favorable Q4 earnings results and expectations for strong +11% earnings growth in 2017, and (3) the recent decline in Treasury yields and the dollar index. Stock investors seem to be more patient in waiting for corporate tax cuts that for many companies would drop straight to the bottom line in higher after-tax earnings (except for companies that are hit by any new border tax or by the elimination of the interest deduction).
30-year T-bond auction to yield near 2.95% — The Treasury today will sell $15 billion of 30-year T-bonds, concluding this week’s $62 billion Treasury refunding operation. Today’s 30-year bond will be a new issue as opposed to a reopening of an old issue.
Today’s 30-year T-bond issue was trading at 2.95% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 0.87% against the current 30-year breakeven inflation expectations rate of 2.08%.
The 12-auction averages for the 30-year are as follows: 2.30 bid cover ratio, $9 million in non-competitive bids to mostly retail investors, 6.0 bp tail to the median yield, 20.0 bp tail to the low yield, and 53% taken at the high yield. The 30-year is the fifth most popular Treasury coupon security among foreign investors and central banks behind the 10-year TIPS security, the 10-year T-note, the 30-year TIPS, and the 7-year T-note. Indirect bidders, a proxy for foreign buyers, have bought an average of 62.3% of the last twelve 30-year auctions, moderately above the average of 58.9% for all recent Treasury coupon auctions.
Today’s 30-year T-bond auction may suffer from some negative carry-over sentiment from the poor demand seen at Wednesday’s 10-year T-note auction. The 10-year bid-cover ratio of 2.29 was below the 12-auction average of 2.50, illustrating a lower-than-normal number of bids. In addition, the tail from the auction yield of 2.333% to the median yield of 2.260% was wide at 7.3 bp versus the 12-auction average of 4.8 bp, illustrating some reluctant bidding for the auction. The weak bidding seemed to come mainly from dealers and domestic investors since foreign investors and central banks (indirect bidders) showed up for the auction once again by taking 63.4% of the auction, slightly better than the 12-auction average of 63.1%.
U.S. unemployment claims expected to remain favorable — The unemployment claims series both remain in very favorable shape, illustrating a strong labor market with layoffs near multi-decade lows. The initial claims series is only +13,000 above the 43-3/4 year low of 233,000 posted in November and the continuing claims series is only +81,000 above the 16-3/4 year low of 1.983 million posted in November.
The market consensus is for today’s initial claims report to show a small +3,000 increase to 249,000 after last week’s -14,000 decline to 246,000. The consensus is for today’s continuing claims report to show a -6,000 decline to 2.058 million, adding to last week’s -39,000 decline to 2.064 million. The claims data is finally past the seasonal distortions caused by the Christmas/New Year holidays and the Jan 16 MLK holiday.
