- U.S. import prices are expected to snap their 8-month losing streak and put some upward pressure on the overall U.S. inflation statistics
- 3-year T-note auction to yield near 0.85%
- Inflation expectations continue to closely track crude oil prices but have also been pushed higher by the recent rise in the U.S. inflation statistics
- Treasury yields are in negative inflation-adjusted territory for maturities of less than 7 years
U.S. import prices are expected to snap their 8-month losing streak and put some upward pressure on the overall U.S. inflation statistics — The market is expecting today’s March import price index to show a solid gain of +1.0% m/m, which would snap an 8-month losing streak and represent the largest month-on-month gain in a year. On a year-on-year basis, March import prices are expected to strengthen to -4.7% y/y from -6.1% in Feb. Import prices are expected to see some strength due to the 4-month decline in the dollar index and the upward rebound in oil prices in March. U.S. import prices ex-petroleum were down -2.9% y/y in February, illustrating that the weakness in import prices has been across the board and has not been caused only by the plunge in oil prices.
Stronger import prices will give the overall U.S. inflation indices a boost just when they have already started to show signs of strength. The core CPI in Feb matched a 7-1/2 year high of +2.3% y/y and the headline CPI in Jan posted a 1-1/3 year high of +1.3% before backing off to +1.0% in Feb. Meanwhile, the Feb PCE deflator is also on the march higher with the core PCE deflator posting a 3-1/4 year high of +1.7% in Jan-Feb. The higher inflation statistics are a key factor convincing the Fed to stick with its bias toward raising interest rates another notch.
3-year T-note auction to yield near 0.85% — The Treasury today will sell $24 billion of 3-year T-notes. The Treasury will then continue this week’s $56 billion coupon auction by selling $20 billion of 10-year T-notes on Wednesday and $12 billion of 30-year T-bonds on Thursday. The 10-year and 30-year auctions will be the second and final reopenings of the securities that the Treasury first sold in February.
Today’s 3-year T-note auction was trading at 0.85% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of -0.58% against the 3-year breakeven inflation expectations rate of 1.43%. Buyers of today’s 3-year T-note can therefore expect to lose -0.58% annually over the course of the 3-year investment if inflation ends up matching the expected 3-year inflation rate of 1.43%.
The 12-auction averages for the 3-year are as follows: 3.10 bid cover ratio, $61 million in non-competitive bids from mostly retail investors, 3.7 bp tail to the median yield, 21.6 bp tail to the low yield, and 41% taken at the high yield. The 3-year is the second least popular security among foreign investors and central banks behind the 2-year T-note. Indirect bidders, a proxy for foreign buyers, have taken an average of 49.2% of the last twelve 3-year T-note auctions, which is well below the average of 55.7% for all recent Treasury coupon auctions.
Inflation expectations continue to closely track crude oil prices but have also been pushed higher by the recent rise in the U.S. inflation statistics — U.S. inflation expectations continue to track crude oil prices fairly closely, but have also been pushed higher recently by the rise in the overall U.S. inflation statistics. Specifically, the 10-year breakeven inflation expectations rate several weeks ago posted a 7-month high of 1.67%, up sharply by 55 bp from the 7-year low of 1.12% posted in mid-February when crude oil hit bottom. The 10-year breakeven rate has since fallen by -10 bp to the current level of 1.57%. The breakeven inflation expectations rate equals the nominal 10-year T-note yield minus the 10-year TIPS yield.
Meanwhile the 52-week rolling correlation between the 10-year inflation expectations rate and the front-month WTI crude oil futures contract is currently at 0.49, which is high but down from the record high of 0.61 posted in early March (the series has data back to 1998). The slightly lower correlation indicates how crude oil prices have lost some influence on inflation expectations, mainly because the recent uptick in the CPI and PCE deflator have also pushed inflation expectations higher.
Treasury yields are in negative inflation-adjusted territory for maturities of less than 7 years — The Treasury yields for maturities of less than 7 years are trading below their respective expected-inflation rates. That means that buyers of Treasury securities with maturities of less than 7 years will lose money on their investment on an after-inflation basis if inflation turns out to match current market expectations. That suggests that something has to give eventually, i.e., either a rise in nominal Treasury yields or a decline in inflation expectations.
Meanwhile, the Treasury curve of 7 years and longer is trading above inflation, but not by much. The current 10-year T-note yield of 1.74%, for example, is trading only 17 bp above the current 10-year breakeven inflation expectations rate of 1.57%, which is far below the average of 179 bp seen since data started in 1998. The current 30-year T-bond yield of 2.56% is trading only 84 bp above the current 30-year breakeven inflation expectations rate of 1.72%, which is far lower than the long-term average of 216 bp.
EIA report — The market consensus for Wednesday’s weekly EIA report is for a +1.0 million bbl rise in crude oil inventories, a -2.0 million bbl decline in gasoline inventories, a +100,000 bbl rise in distillate inventories, and an unchanged refinery utilization rate of 91.4%. U.S. crude oil inventories remain in a massive glut at +33.8% above the 5-year seasonal average. Product inventories are also plentiful with gasoline inventories at +10.8% above average and distillate inventories at +26.9% above average.
