Strong demand at Monday’s two-year Treasury auction lowered yields, steepened the curve, and shifted market focus to upcoming five-year notes.
Following Monday’s well-received two-year Treasury auction, traders are now looking ahead to the longer-dated offering. The Treasury is set to auction $70 billion worth of five-year notes, with the competitive bid closing at 1 p.m. ET.
What Happened On Monday: The 10-year Treasury note yield edged up 1.2 basis points to 4.223% in premarket trading after slipping 2.6 points to 4.2130% on Monday. Yields fell across the spectrum on Monday as bond prices rose, taking cues from a global bond market rally and a strong reception to the two-year note auction.
At the 1 p.m. ET auction deadline on Monday, the two-year auction was priced at 3.580%, lower than the expected rate. This suggests strong demand for these notes, with investors willing to accept a rate below expectations. The bid-to-cover ratio was 2.75 compared to an average of 2.61.
The U.S. Treasury yield curve, which plots the spread between the 10- and 2-year yields, steepened following the auction, reflecting expectations for a more resilient economic environment.
Source: St. Louis Fed
Why This Matters For Futures Traders: If demand stays strong, it would confirm the continued strong demand for U.S. assets despite the sell America and the debasement trades that have gained ground amid the recent geopolitical tensions. The debasement trade refers to a move away from fiat currencies due to fears of value erosion, stemming from fiscal indiscipline, financial repression, and geopolitical uncertainty.
When bond yields fall, the discount rate, typically a risk-free yield such as Treasury yields, plus a risk premium, used to value future corporate cash flows, declines, increasing the net present value. This, in turn, pushes up stock valuation even without any increase in earnings estimates.
Lower yields exert downward pressure on the dollar, in turn pushing up dollar-denominated commodities. Lower yields accompanied by stable or rising growth expectations are positive for industrial metals.