Treasuries Trading Heavy into a Trio of Auctions

Treasuries Trading Heavy into a Trio of Auctions This Week

• Treasury prices are opening the week lower and given the robust rally in prices last week it’s not surprising that some give back is in play. Also working against higher prices are a trio of coupon auctions this week which should keep any rally attempt in check until the new supply of 3yr, 10yr, and 30yr paper is put away (more on that below). Presently, the 10yr note is yielding 4.63%, down 13/32nds in price, while the 2yr is yielding 4.90%,  down 3/32nds in price.

• After last week’s busy calendar of events, the pace this week slows.  As an example, today’s highlight is the Fed’s quarterly Senior Loan Officer Opinion Survey on Lending Conditions. Recall the second quarter survey was eagerly anticipated as it followed the March regional banking turmoil.  While some tightening in lending conditions was noted in that survey it wasn’t particularly compelling. This afternoon’s update will be viewed for further tightening as lenders brace for slowing economic conditions and an ongoing preference for abundant liquidity.

• Part of last week’s focus was on the US Treasury’s announcement for this quarter’s auction sizes. The announcement was met with a rally in Treasuries as the increased auction amounts weren’t as large as feared as the Treasury opted to increase the 2yr to 5yr coupons more than the longer maturities.  This week we’ll get to see 3yr, 10yr, and 30yr maturities come to market and assess investor appetite, especially in the face of the nearly 45bps drop in the 10yr yield last week. With those auctions looming it’s no surprise Treasuries are trading heavy as the week opens.

• While the data calendar is light this week, the Fed Speak will be hot and heavy with more than a dozen officials offering their views and opinions headlined by Chair Powell on Wednesday and Thursday. With the FOMC meeting last week, we don’t expect much change from that narrative. However, with the reference to tighter financial conditions mentioned as one of the reasons to pause, it will be interesting to see if any hedging of that view starts to creep in given the dip in yields last week.  We tend to think that if the 10yr remains near 4.25% – 4.50%, or above, the Fed would continue the pause in December assuming the slowdown theme that was noted in several releases last week continues.

• As mentioned, the data calendar is very light with the preliminary University of Michigan Sentiment Survey for November, to be released on Friday, the highlight. Recall the October survey noted a healthy increase in both the 1yr and 5-10yr inflation expectations which is not what the Fed wants in their quest to keep inflation expectations “well anchored” lest those expectations of higher inflation become self-fulfilling. It’s been noted before that this survey’s inflation expectations have a lot in common with the price of gas and the spike in gas prices in August and September probably contributed to the jump in October’s inflation expectations. Gas prices subsequently dipped in October (see graph below) so maybe that will lead to a softening in inflation expectations in this survey. Also, the drop in gas prices should be bode well for the October CPI numbers, but some of the decline occurred after the mid-month survey so maybe that’s more a November story.

National Daily Average Price Per Gallon Regular Unleaded Gasoline