This week’s U.S. debt auction reached $183 billion!Traders look for signs of peaking in two-year U.S. Treasury yields Provided by Zhitong Finance

Zhitong Finance APP has learned that with U.S. Treasury bonds expected to record their worst monthly performance this year this month, a large number of Treasury bond auctions are about to become a major test to see whether yields have peaked after reaching their highest level in 2024.

Investors are bracing for a tricky week as markets face the risk of further volatility due to tensions in the Middle East. The market must digest two-year, five-year and seven-year Treasury auctions totaling $183 billion. Among them, the two-year and five-year U.S. bond auctions will reach record levels. In addition, the U.S. PCE price index data for March will be released this Friday night. This key inflation data will affect market expectations for the direction of Fed policy.

The strong performance of the U.S. economy and sticky inflation have led traders to postpone bets on a Federal Reserve interest rate cut until the end of 2024, and U.S. bond yields have risen sharply this month. The latest sell-off in U.S. Treasuries briefly pushed the two-year U.S. Treasury yield above 5% after Federal Reserve Chairman Jerome Powell signaled last week that the Fed was in no rush to ease policy. However, there are already signs that investors are looking to buy U.S. Treasuries to lock in high yields.

Currently, the 5% yield level appears to be the magic number for bond managers seeking short-term investments. Jack McIntyre, portfolio manager at Brandywine Global Investment Management, believes Powell’s speech reinforced the feeling that U.S. bond prices may have bottomed. “If the Fed sticks to its guns and fights inflation, that means yields will peak,” he said. “If the Fed exits prematurely and cuts rates, yields will surge.”

Data show that the two-year U.S. Treasury yield closed at around 4.99% last week, so Tuesday’s auction has a chance to obtain a coupon rate of at least 5%, which will be the first time since last year. Prior to this, investors had not seen levels like these in more than a decade. Michael Cudzil, portfolio manager at Pacific Investment Management Company (Pimco), said: “The coupon rate on the two-year U.S. Treasury note may reach 5%, which is about the same.” He added: “The market has significantly reduced interest rate expectations, and the current U.S. Treasury prices are reasonable, so there will be a range of good outcomes,” he said. Pimco has been increasing its interest rate exposure, favoring short-term and five- to seven-year U.S. Treasuries.

Of course, there is also the risk that yields will continue to rise to the peak last October, when the yield on the 10-year U.S. Treasury note once rose to more than 5%. This is the significance of the US March PCE price index data to be released on Friday. The year-on-year increase in the U.S. core PCE price index in March is expected to rebound slightly to 2.6%, up from 2.5% in February, which may mean that inflation’s progress towards the Fed’s 2% target has stalled. Previously, the U.S. CPI in March once again exceeded expectations, which has attracted the attention of traders.

However, there are ample signs that demand for U.S. debt is emerging. Last week’s auction of 20-year U.S. Treasury notes was well received. JPMorgan Chase’s latest client survey showed that the proportion of investors net long in U.S. Treasuries was the highest in weeks. Investors also believe that a rise in the two-year U.S. Treasury yield to 5% presents a buying opportunity.

While traders now expect the Fed to wait until the fourth quarter before cutting interest rates, the prospect of at least some policy easing this year suggests there is room for appreciation in new two- and five-year Treasury prices. “Despite CPI being higher than expected, two-year Treasury yields around 5% remain attractive as the Fed’s base case is for rate cuts,” said Priya Misra, portfolio manager at J.P. Morgan Asset Management.

Bond investors see another potential source of demand for the 5%-yielding two-year note – money market funds. Data showed that money market funds’ cash reserves fell sharply over the past week to below $6 trillion. While this pullback may be tax-related, retail investors may start to see the appeal of locking in 5% yield levels into 2026 as the two-year Treasury yield approaches levels closer to the federal funds rate range. force. Jack McIntyre said: “The move away from cash and toward some fixed income is likely to occur in stages, starting with a move to shorter duration assets.”