September 20, 2023

Long-dated Treasury Futures Rise in the wake of debt ceiling deal

(Bloomberg) — Treasury futures tied to the 10- to 30-year portion of the U.S. Treasury bond market rose at light volume Monday as traders looked ahead to a range of supportive factors that could come into play when trading closes Tuesday after the Memorial Day holiday.

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These include rising expectations that the Federal Reserve is likely to raise rates again in June or July, and predictions that the adoption of a debt ceiling will unleash a deluge of short-term Treasury issuances, draining liquidity from markets and potentially creating dents. the performance of risk assets. This week also brings a month-end rebalancing of the US Treasury bond index with large quarterly new issues of 10- and 30-year debt, which could boost demand for those sectors of the market.

Government bond yields across the maturity spectrum hit their highest levels since early to mid-March on Friday, wiping out most of the declines caused by that month’s regional bank failures, raising the specter of generally tighter credit conditions . The 10-year yield crossed 3.85%, up from this year’s low of 3.25% in April. However, interest rate increases in recent weeks have been led by shorter maturities, reflecting higher expectations for rate hikes by the Fed.

The debt ceiling deal could boost demand for long-term government bonds on the assumption that it will be restrictive on the economy, said Andrew Brenner, head of international fixed income at NatAlliance Securities.

“It’s going to take money out of the economy at the federal level,” he said. But yield levels reached Friday also point to a short position in bonds, drawing buyers into rallies, he said.

Price action in Treasury futures suggested that long-term Treasury yields will fall when bond trading resumes Tuesday, while short-term yields remain near multi-month highs. The longest-maturity Treasury contract, Ultra Bond, was up 1 basis point at 1:00 p.m. New York time, when electronic trading on CME Group Inc.’s platform began. went into a paused state until 6 p.m., the start of the trading day in Asia. Volume totaled approximately 56,000 contracts, compared to a daily average of 254,000 this year through April.

While Congressional approval of the compromise reached by US President Joe Biden and Speaker of the House of Representatives Kevin McCarthy remains uncertain, the gains may be particularly marked for Treasury bills, which were most at risk of not meeting in a timely manner. pay the holders. That includes Treasury bills maturing in the first half of June, which had yields spiked to more than 7% in some cases last week as some investors chose to avoid them altogether. However, those yields started to fall again on Friday on signs that an agreement was within reach.

The agreement to suspend the debt limit until January 2025 may also boost the repricing of US sovereign debt swaps, derivatives that help investors insure against default, which have surged to multi-year highs over the past month. Fitch Ratings warned on May 24 that the US credit score could be downgraded, placing it at negative because the debt limit was not addressed until the federal government nearly exhausted its cash balance.

With swap contracts pricing in a rate hike of more than half a quarter point from the Fed in June as of Friday, and a full price hike in July, the employment data released this week is critical. Job creation exceeded economists’ average estimates in April and each of the previous 12 months. However, Fed officials are divided in their public comments on how to balance an anti-inflation stance with the possibility that the central bank’s 10 rate hikes totaling 5 percentage points over the past 14 months warrant a June pause.

“Inflation numbers are not cooling enough for the Fed,” Kevin Flanagan, head of fixed income strategy at Wisdom Tree Investments, said Friday. “The market is already turning towards a more restrictive Fed, and the clock is ticking towards the June meeting.”

–With assistance from Benjamin Purvis, Liz Capo McCormick, and Michael Mackenzie.

(Adds futures chart, price change, and volume.)

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