U.S. Treasury bond yields extended their pullback following a key auction of short-term debt Tuesday, but demand for the new paper weakened, particularly from foreign investors, suggesting billionaire investor Bill Ackman's call for an end to the selloff could face near-term challenges.
The Treasury sold $51 billion in new 2-year notes as part of its quarterly refunding program that includes bigger auction sizes as it looks to raise around $103 billion from coupon-bearing bond sales over three months ending in December.
Related: Billionaire investor makes a move on bonds, has a dire warning about the global economy
Investors placed bids worth more than $134.4 billion for the $51 in notes put up for auction, providing a so-called 'bid-to-cover' ratio, a key indicator of demand, of 2.64.
That's down from the 2.73 bid-to-cover ratio recorded at the previous auction in September, however and the six-month average of 2.82 and and suggests investors are still wary of a return to the bond market following one of the biggest market sell-offs since the pandemic.
Foreign buyers, typically central banks, took up 62% of the $51 billion sale, down from the 65% figure reported in September and below the near-term average of around 65.5%.
Demand could be tested further into the end of the year, however, after Treasury Secretary Janet Yellen publishes her quarterly refunding report on November 1 — also the day of the next Fed rate decision — which will outline the size of benchmark auctions, as well as the overall debt-raising mandate, heading into 2024.
Benchmark 2-year notes were trading at 5.077% in the wake of the auction, which drew a high yield of 5.055%, with 10-year notes last seen pegged at 4.827% in mid-day New York dealing.
The auction comes less than a day after Ackman, who runs Pershing Square Capital Management, claimed to have covered his short position in the Treasury bond market following the first move past 5% for 10-year notes since 2007.
"There is too much risk in the world to remain short bonds at current long-term rates," he said through his verified account on the 'X' social media website. "The economy is slowing faster than recent data suggests."
Data published by S&P Global on Tuesday, however, suggests economic activity in the services sector, the most important growth driver, quickened in October, with the group's benchmark PMI survey coming in at 50.9, just nudging past the 50 point mark that separates growth from contraction.
The Atlanta Fed's GDPNow forecasting tool, meanwhile, suggests a current quarter growth rate of 5.4%.
A combination of faster inflation, a hawkish Federal Reserve, a resilient job market and the prospect of deeper government borrowing to fund record fiscal deficits have all combined to push Treasury yields higher since mid-summer, with the only notable pullback coming over the past two sessions — and following Ackman's message on social media yesterday.
More meltdown?
Some investors think there may be more room for rates to move higher as well given that long-dated yields are still trading at a discount to both the current effective Fed Funds rate of 5.33% and the projected rate of 5.6% based on bets of at least one more rate hike over the coming months.
The upward spike in Treasury yields is also coming amid what would normally be a significant move into safe-haven assets linked to the accelerating military conflict in the Middle East, following the deadly attack from Hamas in southern Israel on Oct. 7.
"The prices for oil and gold received bids, while equity prices understandably pulled back in the wake of the attack, yet U.S. Treasuries and the dollar have not received the usual “safe haven” buying strength, likely due to the concerns of global investors over expanding supply following the recent credit downgrade," said John Lynch, CIO for Comerica Wealth Management in Charlotte.
A host of reasons could explain that reluctance, including concerns over the fate of U.S. fiscal policy, its ongoing debt ceiling debates, the current debate on spending cuts in Washington and the inability of Republican lawmakers to elect a House speaker. All are combining to make Treasuries less attractive.
"After spending the last couple of years obsessing over the direction of monetary policy, bond investors have recently turned their attention to fiscal challenges," Lynch added.
The Fed is also selling around $75 billion a month in Treasury, agency and mortgage-backed bonds back into the market as part of its 'quantitative tightening' program.
This allows the Fed to reduce the size of its $7 trillion balance sheet while lifting market interest rates that, in turn, support the higher levels of its official lending rate.
New rate era on the horizon
The underlying economic strength, including the lowest levels of unemployment in nearly five decades and the more than 10 million unfilled positions that could require rising wages to fill, is also adding to broader inflationary pressures that could resurface over the coming months.
The CME Group's FedWatch, however, suggests no better than a 33% chance of another Fed rate hike between now and next June, with the best odds of a cut by then sitting at around 38.6%.
"Investors will enter a new era for rates next year," said Jeffrey Roach for LPL Financial. "If the economy slows as predicted, the Fed will likely start discussing plans to cut rates ... but those cuts may not come until the second quarter of 2024 and the magnitude may not be anywhere near as aggressive as markets thought just a year ago."
"The mantra of 'higher for longer' indicates that, despite the potential for a recession, the Fed will not be inclined to aggressively cut rates and should keep rates higher throughout the year," he added.
Let the meltdown continue.
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