Here’s an interesting data point from the US Treasury market overnight.
Some $40bn of two-year notes were sold at a record low yield of 0.789 per cent on Tuesday, with a bid to cover ratio of 3.45 — the highest since October 2009, according to Bloomberg — and direct bidders at a record-breaking 15.1 per cent.
So what is this telling us?
According to William O’Donnell of RBS this “superb auction” shows investors are still worried about weak growth and deflation, and for the moment aren’t bothered by China’s decision to make its currency more flexible:
You knew something was up when the Treasury 2yr note would not follow the rest of the curve lower on Monday morning after China’s FX regime change. The 2yr note closed Monday within 2bp of major resistance at 0.70%– and just hours before $40B new 2′s were to hit the market. Today’s auction results speak to the buoyant bid in the Treasury market. Indeed, market participants went beyond simply chalking up today’s 2yr auction as just “a moment in time” and instead used the solid results as evidence that there are growing investor fears about weaker growth and further disinflation.
Although we wonder whether end-of-quarter window dressing played a factor.
Strong demand for the two-year notes had a knock effect on the rest of the market, with Treasury 10 year notes having their first 3pm close below 3.175 per cent since May last year.
And they remain well bid this morning, says Bloomberg:
Treasury 10-year yields were near the lowest in almost two weeks on bets the Federal Reserve will maintain its commitment to keep interest rates at a record low for an “extended period” to safeguard the recovery.
The notes rose for a second day as stock-market losses fueled demand for the perceived safety of government debt.
The Federal Open Market Committee will keep interest rates at a record low at the end of its two-day meeting, according to economists surveyed by Bloomberg News.
“Today’s FOMC statement should underpin the overall positive trend in Treasuries,” said David Schnautz, a fixed- income strategist at Commerzbank AG in London. “The positive mood made yesterday’s supply rather an opportunity to add” to bond holdings, he said.
The 10-year note yield dropped one basis point to 3.16 percent as of 7:43 a.m. in London, according to BGCantor Market Data
Risk off then.
Related link:
Predictions of a bond market bubble are wrong – FT