Are Deficit Concerns Finally Dogging the Treasury Market?

• Treasuries find themselves on the backfoot today as concerns over budget deficits and fresh supply overwhelm the risk-off selling that’s occurring in equities this morning (Dow indicated down 380 points). A 5+% yield on 20yr Treasury bonds should entice buyers in today’s auction but that maturity is typically the weak link in the Treasury market so watch for how those results (at 1pm ET) are received. Currently, the 10yr is yielding 4.54%, up 6bps on the day, while the 2yr is yielding 4.00%, up 3bps on the day.

 

• With no consequential economic data on offer today, the market will have to be content in watching Congress and the fate of the President’s “Big, Beautiful Budget Bill.” Part of the anticipation by financial markets of a Trump victory last fall was the advertised tax cut extension and deregulation that would catalyze continued GDP growth. Some of that anticipation has turned to a measure of angst as the prospect of another $3 trillion added to the deficit (over a 10yr period) has raised the specter of bond vigilantes voting no. The 30yr bond yield creeping over 5% is a signal to some that anxiousness over fiscal profligacy has increased (see yield graphs below).

 

• The chaotic rollout of the tariff “plan” has also unnerved investors, especially the foreign variety,  and damaged the administration’s credibility in the eyes of some. The fallout from that is less leeway given by the market to words and more on deeds. For now, yields have crept higher signaling less a buyer’s strike and more buyer’s hesitance. If that shifts to more of a strike posture expect the creeping yields to become something more forceful.

 

• That brings us to what could be Wednesday’s main event with the Treasury’s $16 billion auction of 20-year bonds. When Issued 20-year rates are hovering just over 5.0% and if the auction clears there, which is highly likely, it will represent the highest yield for a 20-year since the bond’s reintroduction in May 2020. With 20-year rates trading up 24bps since last month’s auction level of 4.810%, one would casually suspect the new 20-year bonds will be met with solid end-user demand.

 

• While foreign participation levels, or lack thereof, is the current preoccupation of Treasury auction analysts (yes, there apparently is such a position), non-dealer sponsorship (taken as a proxy for foreign investors) for longer-dated debt has been solid in the May refunding cycle thus far, with the 10- and 30-year auctions both seeing non-dealers take an above-average allocation. The 20-year tenor, however, has always been the weak link in the Treasury market given its limited history so if weakness in demand is going to present itself it’s likely to be in the 20-year first. The auction results will be released at 1pm ET, so expect some volatility to arise from the results.

 

• The highlight of the releases this week will be the weekly jobless claims tomorrow, and that report is expected to reflect little in the way of increased layoffs. Investors, and the Fed, are looking for signs of labor market slowing and layoffs increasing, but so far jobless claims have been quiet. Expectations for this week are the same with claims expected to inch up from 229 thousand to 230 thousand.

 

• Meanwhile, the preliminary S&P Global US PMI series for May will be released tomorrow with a drop back into contractionary territory expected for the manufacturing sector (49.9 vs. 50.2). The services sector, however, is expected to tick higher from 50.8 to 51.0 indicating that sectors continued resilience, albeit flirting with contraction territory.

 

• With no releases due on Friday, and a holiday weekend in the offing, attention will be less about the latest economic data points and more about how the Treasury market trades around the new supply and budget bill news.

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30 Yr Treasury Yield Up and Over 5%Source: CNBC

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Meanwhile, 10Yr Treasury Up and Over 4.50%Source: CNBC

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Finally, the 20Yr Treasury Bond Over 5% in Advance of Today’s AuctionSource: CNBC