Bond Traders Like the Treasury Department Today

Stocks are doing reasonably well this morning despite some high-profile earnings disappointments.  They have the bond market to thank for that, and the bond traders can thank the new Treasury secretary for a benign refunding announcement and benign economic data.

The bond market had been waiting for the Treasury Department’s quarterly refunding announcement.  This is always a key metric for bond traders because it outlines the likely amount and tenor of the supply of debt that the government expects to borrow over the coming three months.  The price of any tradeable item is determined by supply and demand, and while demand might ebb and flow over time, it is quite helpful to know what the expected supply of bonds might be.

Today’s announcement was a bit more highly anticipated than most because it was the first with Secretary Bessent at the helm.  He had previously expressed hostility to the prior administration’s strategy of offering proportionally more short-term than longer-term debt.  Another member of the administration, Dr. Stephen Miran, the pick for chair of the Council of Economic Advisers, was also a vocal advocate for lengthening the duration of Treasury borrowing, something he discussed in an IBKR Podcast with us last year.  Thus, there were concerns that the long end of the curve might need to deal with a big bump in supply.

Instead, while the announcement did show increases in 5- and 10-year inflation protected bonds (aka “TIPS”), the statement featured this comment, which calmed nerves at the long end of the curve:

Treasury believes its current auction sizes leave it well positioned to address potential changes to the fiscal outlook and to the pace and duration of future SOMA redemptions. Based on current projected borrowing needs, Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters.

Yields across the curve fell, with the long end falling faster than the short end, flattening the yield curve.  The improvement in yields came despite much higher than a much higher-than-expected ADP employment report – which the market chooses to ignore from time-to-time – and then improved further after a weaker reading in ISM Services (52.8 vs 54 exp.).  We now have 2-year yields about 4 bp lower and 10-years about 9bp lower. 

Bear in mind that bond yields, which tend to overshoot when they are trending, have been improving since peaking at 4.80% around mid-January.  Yields had been rising from September through the end of the year, and that rise continued for another two weeks before petering out.  Now the trend appears to be for lower rates and a flatter curve.  Let’s see if that overshoots too.

But regardless, the bond rally has enabled stock traders to look past some poor post-earnings performances by popular tech stocks.  Alphabet (GOOGL, GOOG) is about -7.5% lower after cloud results disappointed, AMD is about -6.5% down on disappointment about data center growth, and UBER is about 7% lower on weak bookings guidance.  Instead, we see the S&P slightly higher at midday with a strong majority of stocks and sectors trading higher.  Yes, stocks can do OK even if tech disappoints, at least in the short-term, if the economic backdrop helps sufficiently.