Bond Report: Treasury yields fall as market readies for Powell testimony, debt auctions

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Treasury yields fell for a second day Tuesday morning ahead of testimony from Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen, who are due to make their first of two days of talks about the U.S. economic recovery from the COVID pandemic in front of congressional lawmakers.

Debt investors also are bracing to digest the start of some $180 billion in issuance in government paper in the first test major test of appetite for Treasurys, experts say.

How are Treasurys faring?
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.640%

    yield was at 1.630%, down 5.2 basis points, after putting in its biggest yield drop since March 9 on Monday at 3 p.m. ET.

  • The 30-year Treasury bond
    TMUBMUSD30Y,
    2.356%

    was yielding at 2.349%, off 3.2 basis points early Tuesday, after putting in its steepest yield drop since Feb. 26 a day ago.

  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.149%

    was yielding 0.145%, compared with 0.149% on Monday.

What’s driving Treasurys?

Bond-market investors have been focused on rapidly rising yields of Treasurys on concerns about a pickup in inflation in 2021 as the economy recovers with help from President Joe Biden’s $1.9 trillion fiscal stimulus, but the week so far has offered some respite from the steady selloff in bonds.

Part of the pullback in yields has been attributed to the extension of COVID lockdowns in Europe, which has tamped down some optimism about a rapid recovery from the pandemic.

Investors, however, will continue to key into the resiliency of the Treasury market with a $183 billion in short- and intermediate-dated debt set to be sold, starting later Tuesday.

The Treasury is slated to sell $60 billion in 2-year notes at 1 p.m. That offering will be followed by $61 billion in 5-year notes
TMUBMUSD05Y,
0.822%

Wednesday, and $62 billion in 7-year notes
TMUBMUSD07Y,
1.286%

on Thursday.

The auctions come as the Fed has said that it plans to end regulatory capital relief for banks. The move has been viewed as one factor behind the rise in yields, as it could remove a major buyer of Treasurys if banks no longer can exclude Treasurys and deposits held at the central bank from their so-called supplementary leverage ratios, or SLR, a key measure of balance-sheet strength.

Meanwhile, investors will closely watch Powell and Yellen’s testimony on Tuesday in front of the House Committee on Financial Services at 12 p.m.

The Wall Street Journal reports that the Biden administration is crafting a plan for a multipart infrastructure and economic package that could cost as much as $3 trillion, fresh off the administrations $1.9 trillion COVID package.

In Europe, the European Central Bank increased its asset purchase under its Pandemic Emergency Purchase Program, or PEPP, as the weekly report of bond-buying confirmed yesterday.

In prepared remarks released on Monday, Powell said that the U.S. economy has recovered more quickly than generally expected “and looks to be strengthening,” but cautioned that the comeback is far from complete.

Looking ahead, investors will also be watching for comments from Fed Gov. Lael Brainard, in the afternoon as well as a batch of other Fed speakers.

What are fixed-income strategists saying?

“My belief that the Fed is verbally conducting yield curve control out 2+ years will be tested today by the market with the Treasury’s 2 yr note auction,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a Tuesday note.

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