Bond Traders Adopt Show-Me Mode to Avoid More Losses

We’re going to go back to the Treasury market, where there is a sell off under way. Most U.S. Treasury yields have climbed to new highs for the year just today. After that hot retail sales data hurt investor confidence that the Fed could start cutting interest rates this year. Remember, there’s also another wave of Treasury issuance this week with roughly $140 billion worth of short term bills flooding the market today alone. And this is all made bond traders wary, particularly as Apollo’s Torsten Sloth points out, a record $8.9 trillion of Treasuries, or a third of the outstanding U.S. debt, is set to mature this year. He warns about spotting the first signs of fiscal stress, and Bloomberg’s Liz McCormick has been covering these moves. Let’s talk about the confluence of what’s going on here, Liz, because on one hand you are seeing pretty drastic moves in short term yields. Just today, how do you take a note from what bond traders are telling you? Yeah, I mean, right now there is nothing to stop this, right. We had some concern of escalation in the Middle East. We saw rates go down on Friday. We had what happened over the weekend. Luckily for now people feel that’s contained. So they’re trading back on the data, right. So retail sales was strong and Shonali, they can’t seem to get any data right now. I think it’s like a show me the data that makes me think I should start pricing in more aggressive Fed easing and it’s just not there, right. The economy is running strong three months in a row of strong CPI. So people it’s amazing we’re pricing less than two cuts now, right, for the Fed this year. So I think people are just saying I don’t want to go over my skis now and like Torsten’s talking about we have a lot of supply of bills now. People have been buying the because you know people like you know look at all the money in money market accounts right. So those those fund manager buying bills as well because yields are attractive and as you laid out if the Fed is not going to cut anytime soon that makes you know sticking close to home and short term not a bad trade for people. So you know all that debt supply has been, you know, bought fairly well with the bills that we did have auctions last week, the 10s and 30s and the longer dated, that didn’t go so well, right. There was a lot of demand. You think about Congress considering aid packages now as well and you think about the existing financing needs of the United States. How do you think about this issuance? And at what point you do see some cracks in it? Yeah, we’ve been watching this for a long time, right? And I was mentioning that in a few weeks, same same time as the Fed meeting, we have the Treasury’s quarterly refunding. And so everyone will really be watching that. You mean the consensus is that they’re going to keep note and bond sales steady. They’ve kind of flagged that, but we we have a lot of cross currents going on and depending on how the election goes, if there’s more fiscal spending then you know that there might be need for more issuance, some more warning, we also have like a positive for the treasury is if the Fed does taper the amount of QT because now they’re kind of rolling off some of their treasuries every month, they may do less of that. So it may mean that’s a kind of a positive for the Treasury because that’s less they have to buy from the public. So there’s a few cross currents. We’ll really be watching that. But yeah, you know if supply had a big investor say to me like 10 year at 4 1/2 and 5% seems fair. But if supply issues and you see more people pushing back, then you don’t know where it’s going. Well, Speaking of a lot of this issuance has come on the short end. I had one source even tell me, you know, it’s pretty much like the treasury just issuing cash, just spinning off cash. And so you know we see 120 year auction later this week. How are people thinking about the possibility for more duration? It’s not going that well. Yeah, exactly. And the 20 year has had a lot of problems as you know. I mean it’s done better. They cut the size of it, but the since they relaunched it a few years ago, it hasn’t been an investor favorite. So I mean I would just speculate, you never know it could go well but the 10s and 30s not going too well and rates going up again this week you you wonder if people want to stand in front of this and buy 20. So we will have to see yeah for sure how much control does the Fed have over the long end given everything you’re saying it well not a lot. I mean you know their biggest control on the long end is and it’s more forceful on the kind of let’s say positive side when they’re doing QE buying a lot of bonds. You know, there’s been a lot of studies that shows that’s more impactful, brings downturn premium, brings down long term rates. The QT is a a tightening of sorts, a little negative, but that’s a little less impactful. So the Fed, you know, doesn’t have a direct hand on the long end, right. So they control their short rate, they do their, you know, balance sheet stuff. But the long end is kind of worried, you know, rising fiscal deficits, higher term premium is needed. I don’t know, there’s just not a lot of people are telling me I’m looking for the 10 year yield to go to 3% or something. It’s pretty crazy. It’s like the IPO market here going smoother than the US Treasury auction market.