As noted earlier, bonds fell and the dollar rose as Wall Street turned its attention to today's - and this week's - record bond supply - which as Goldman explained over the weekend , is just the start as the US set offs on an "unsustainable" increase in debt, and which this week consists of an unprecedented amount of 4-Week, 3- and 6-Month Bill issuance, as well as 2, 5, 7 and FRN notes to boot.
Today's selloff was driven by 2Y Treasuries which rose as high as 2.2436%, the highest level since just before the Lehman bankruptcy, while the eurodollar curve steepened too. Yields on 10Y bond rose to 2.93% earlier before fading half of the move.
Commenting on the sharp moves in yields, last week Jeff Gundlach noted that "UST 2 yr, 3 yr, 5 yr, 7 yr & now 10 yr yields all rising >200 bp annual rate since 9/7/17. Faster than Fed hiking."
One-by-one they join in. UST 2 yr, 3 yr, 5 yr, 7 yr & now 10 yr yields all rising >200 bp annual rate since 9/7/17. Faster than Fed hiking.— Jeffrey Gundlach (@TruthGundlach) February 14, 2018
As explained last night, the Treasury will sell 3-month bills worth $51 billion and 6-month bills for $45 billion, both unprecedented in their size, with a historic total of $179 billion in bills and notes for sale today:
- 11:30am: U.S. to Sell $51BN 3-Month Bills
- 11:30am: U.S. to Sell $45BN 6-Month Bills
- 1pm: U.S. to Sell $55BN 4-Week Bills
- 1pm: U.S. to Sell $28BN 2-Year Notes
In sum, total issuance this week is expected to hit a record$258 billion.
As Bloomberg observes, the glut in supply follows the passing of a two-year budget deal on Feb. 9 that raises government spending by nearly $300 billion. And, as Goldman and others have warned, investors will now brace themselves for a deluge of issuance over the coming months and years as President Donald Trump’s fiscal stimulus seeks trillions in debt to boost growth; if it fails US deficits are set to soar according to John Davies, a U.S. interest-rate strategist at Standard Chartered Plc.
“The market is setting up for the T-bill and two-year auctions due today, with two-year floating rate notes, five-year and seven-year Treasuries still to come this week,” Davies said.
"The immediate question is what level of yields will be required for that additional supply to be digested, and of course beyond that how the deficit will actually develop."
We will have the first answer as soon as 11:30am ET when $96BN in 3- and 6-Month bills are sold in what could be the start of biggest bond market test in history.
Needless to say, a failing grade would mean that the 10Y approaches, and perhaps crosses, the "red line" of 3%: according to BBG, CrossBorder Capital said that the 10-year yield could test 3.5% this year, which would set in motion a wave of repricing that would ripple across markets.
"U.S. safe assets - the U.S. dollar and U.S. Treasuries - have been trading 10 percent to 20 percent expensive,” CrossBorder said. “As they adjust lower, more traditional risk assets will similarly fall in price, much like previously occurred in 1987 and 1994."
Goldman, meanwhile, expects the 10Y to hit 3.25% by the end of 2018, amid the debt issuance deluge needed to fund the soaring US deficit, and warning that "the continued growth of public debt raises eventual sustainability questions if left unchecked."
Finally, even bond bulls like BMO's Aaron Kohli are bracing for the 3% test in the coming trading sessions: “We’ve got supply and some supports have given way,” he said, referring to the 10-year note breaching the 2.94 percent level last Thursday. “We could see another revisit this week."
Which is ironic, because as we showed yesterday, the level of short covering across the curve in the last two weeks was close to all time highs over fears the Fed may actually easy policy after the early February volocause...