A recent string of Treasury auctions has suffered from weak investor demand.
Strategists at TD Securities raised the question of whether it’s a “canary in the coal mine.”
But Ed Yardeni thinks yields are already at the right levels to start bringing back demand.
A string of recent Treasury bond auctions saw a major slump in investor demand, and that could be a harbinger of a trend that sends yields higher, strategists said.
On Thursday, the US sold $20 billion of 30-year bonds. But dealers had to pick up 18% of the sales, greater than the typical 11% share, as more buyers balked. That followed similarly weak auctions this past week for three-year and 10-year Treasurys.
In a note Thursday, strategists at TD Securities raised the question of whether it’s a “canary in the coal mine.”
“While end-user takedowns at auctions have remained high in recent years, the recent drop in end-user demand is concerning as dealer capacity to backstop auctions remains lower due to limited balance sheet availability,” they wrote.
They added that investor conviction is low while the Treasury Department will likely increase the size of its auctions in the coming months, with more long-dated debt coming to market.
TD Securities warned this could put upward pressure on rates, which will weigh on economic growth and eventually lead rates lower by year-end and in 2024.
“In the near-term, however, worries about a lack of demand for Treasurys could allow rates to re-test recent highs, with 10s potentially making a run at the 5% mark,” they said.
But market veteran Ed Yardeni told Insider that bond yields could already be at the right levels to bring back demand.
He also noted that while the recent auctions didn’t go well, bond yields didn’t shoot to new highs. In fact, the 30-year rate still remains below its 5% peak, and the 10-year yield is headed towards a 4.6% level.
“I think 4.5% to 5% is going to create enough demand to meet supply at these levels. If that’s the case, then they don’t have to continue to increase,” he said, but added, “We may be where we’re going to be for a while.”
Yardeni’s forecast contrasts with other projections made by leading commentators, with the likes of Bill Ackman, Larry Fink, and Bill Gross predicting highs above the 5% threshold.
But while such outlooks are driven by their concerns over high future inflation, Yardeni said it’s moderating.
Meanwhile, a potential US debt crisis — a fear that has helped drive the sharp Treasury sell-off since August — is not an inevitable scenario, Yardeni said, though it is a real concern.
In his view, yields are soaring as activist traders, known as bond vigilantes, are trying to push interest rates to levels that will force the US government to tackle its runaway deficits and debt.
If left unaddressed, the fiscal situation will reach a breaking point that could send the US into some form of default, Penn Wharton recently predicted.
But for now, bond market yields should level off after weeks of turmoil, Yardeni said.
“Our baseline scenario requires that the bond yield is now high enough to equilibrate the supply and demand for Treasury securities without causing a recession,” he wrote in a Friday note, adding: “We will be watching the Treasury’s bond auctions in coming months, along with everyone else, to see whether the bond yield is stabilizing or needs to go higher to clear the Treasury market’s supply.”
Read the original article on Business Insider