Bond Report: Long-dated government bond rates rise as Treasury announces plan to sell 20-year debt

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Long-dated U.S. Treasury yields edged higher early Friday after the U.S. Treasury Department announced plans, as had been expected, to issue a 20-year nominal coupon bond in the first half of 2020 to finance a ballooning federal deficit that is nearing 5% of gross domestic product.

However, yields have been little-changed in January as a record-setting stock-market rally has fueled some purchases of havens at least partially as a hedge against a sudden pullback in risky assets like stocks.

How are Treasurys performing?

The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, +1.74%  edged up 2.5 basis points to 1.835%. The 30-year Treasury bond yield TMUBMUSD30Y, +1.57%, also known as the long bond, rose 3.5 basis points to 2.298%.

The 2-year Treasury yield TMUBMUSD02Y, -0.02%, meanwhile was little changed around 1.567%.

So far in January, yields for the 10-year note have lost about 10 basis points, while those for the long bond have shed 11.7, as of Thursday’s close. Short-dated 2-year notes have been little changed, up 0.9 basis point over the same period.

What’s driving the market?

The new 20-year bond was chosen after Treasury officials floated proposals for a 50-year or 100-year bond. The 20-year debt is slated to be sold in the first half of 2020, with more details expected at the Treasury’s quarterly refunding news conference on Feb. 5.

“We seek to finance the government at the least possible cost to taxpayers over time and we will continue to evaluate other potential products,” Treasury Secretary Steven Mnuchin said in a statement late Thursday.

Market participants expect that there will be strong domestic demand for the long-dated securities as investors, including pensions and insurance companies, attempt to match their assets with their long-dated liabilities. On top of that, many global investors are facing trillions of debt that bear negative yields.

Bloomberg News reported that previously issued 30-year Treasurys with about 20-years are yielding about 2.15%, as a gauge of the likely coupon for a 20-year bond issued now.

The expected issuance may lift the long end of the yield curve as fixed-income investors position for richer-yielding assets, perhaps, part of the impetus for the uptick in yields of 10- and 30-year debt, experts said.

Still, overall Treasury yields have been anchored by expectations for muted inflation which is anathema to assets with a fixed value like government debt. On top of that, the Federal Reserve, which next meets on Jan. 28-29, is likely to keep policy accommodative—a fact that also has supported all-time highs for the Dow Jones Industrial Average DJIA, +0.17%   and the S&P 500 index SPX, +0.22%.

Meanwhile, traders also digested data out of China showing the slowest economic growth in nearly three decades, though growth picked up in December. Beijing emerged from 2019 with an official economic growth of 6.1%.

In U.S. economic data December housing starts showed home constructing rising 16.9%, to annual rate of 1.608 million units, to the fastest pace since 2006. However, U.S. industrial production fell 0.3% in December, the third drop in the last four months.

What are strategists saying?

“Risk-on is finally bringing in sellers, however, we still contend that US 10-year yields are in a 1.9 to 1.7% tight range,” wrote Thomas di Galoma, managing director and head of Treasury trading at Seaport Global Holdings, in a daily note.

“We find the Fed contributed heavily to the rates rally since 2018. With the Fed on hold, the range will likely be difficult to break, even if data surprises are large,” wrote fixed-income analysts at Bank of America in a Friday research report.

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