U.S. Treasury yields came off their lows on Wednesday as bond traders made room for the fresh influx of debt supply from the federal government ahead of the Federal Reserve’s meeting next week, where an interest-rate cut is widely expected.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, +0.10% was down 0.7 basis point to 1.761%, after hitting as low as 1.731% in the morning. The 2-year note rate TMUBMUSD02Y, -1.29% fell 2.3 basis points to 1.584%. The 30-year bond yield TMUBMUSD30Y, +0.01% was virtually unchanged at 2.253%.
What’s driving Treasurys?
Bond prices were pressured by a sale of $41 billion of 5-year U.S. Treasury notes as part of the “concession” process, when primary dealers bid yields higher to ensure a successful debt auction.
Analysts suggested there may have been tepid interest among buyers in this week’s round of debt auctions ahead of next week’s Federal Open Market Commitee’s meeting where it is expected to lower rates by another quarter percentage point, the third such cut this year.
In recent days, bond markets have moved on news about the U.K.’s attempts to break away from the European Union, a source of geopolitical concern for the European economy in particular.
U.K.’s Prime Minister Boris Johnson said he may push for a general election, if the EU agreed to extend the deadline for the U.K. to leave the economic bloc. This comes after lawmakers rejected the short timetable for Johnson’s proposals on Tuesday, making it unlikely that he would be able to push for a deal before the end of Oct. 31 but also reducing the likelihood of a no-deal Brexit.
Earlier in the session, a batch of mixed U.S. earnings had investors favoring safe-haven bonds as evidence mounted that the U.S. - China trade war was taking its toll on economic growth. With U.S. stock market heavyweights such as Caterpillar CAT, +1.23% , Texas Instruments TXN, -7.48% and Boeing BA, +1.04% badly missing forecasts, worries are growing that household spending will be next to suffer if the import tariff fights drag on.
Late Wednesday the New York Federal Reserve said it would expand the size of repurchasing agreements starting from Thursday, as part of its operations to inject liquidity into the financial system. The New York Fed said it would increase the amount offered in overnight repo operations to at least $120 billion from Oct. 24 to Nov. 14., and increase the amount offered for longer-term repo agreements to at least $45 billion on Oct. 24 and Oct. 29.
What did market participants’ say?
“In a similar fashion to Tuesday, the early-session rally was in the process of being retraced as [5-year notes] sold off into the auction ... Since the result, yields have dropped across the curve,” wrote Ben Jeffery, a rates strategist at BMO Capital Markets.
“While each day is a new opportunity, the markets seem content with waiting for the Fed, even though there is enough “noise” out there to require earplugs. Things like Brexit, short-term funding, Impeachment, and the back and forth of a potential trade deal continue to weigh heavily on trading activity,” said Kevin Giddis, chief fixed-income strategist at Raymond James.