THE TROUBLED bond markets will face a key test of sentiment this week when the US Treasury auctions a record $60 billion (£37.5 billion) in government debt.
The Treasury will tap the markets tomorrow, Wednesday and Thursday in a series of auctions that will gauge the extent to which investor appetite for debt has waned.
In the past six weeks there has been a record-breaking rout in US bond markets following signs of American economic recovery and concerns about soaring government borrowing.
Since mid-June, yields on benchmark US ten-year bonds — which move in the opposite direction to bond prices — have risen at their fastest rate since records began in 1962.
Bonds came under intense selling pressure last week after data showed that the US economy was growing more quickly than many had estimated. After falling to a 45-year low of 3.07 per cent in mid-June, yields on ten-year US Treasuries rose as high as 4.47 per cent. This was their highest for almost a year.
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This week’s quarterly refinancing operation from the US Treasury — which plans to auction a mix of three-year, five-year and ten-year notes — could add to the pressure on bonds by underlining the upward trends in supply, analysts said.
Others, however, said that they thought the bearish sentiment in the market was overdone, and that yields could soon begin to fall back.
Jon Lee, interest rate strategist at Barclays Capital, said: “People often say that bonds are at their cheapest the week before an auction. I’m not sure there’s any great fears or shocks ahead and much of the increased government supply has already been priced in.”
Daragh Maher, senior economist at ING Financial Markets, said: “I think in general the pace of the upswing in bond yields has caught people out, and there are two schools of thought about where we go from here.
“The first is that there is now so much momentum in the markets that yields are going higher. The second, which we subscribe to, is that yields have moved too far too fast and now it’s time for a pause.”
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The sell-off in bonds was initially triggered in mid-June by Alan Greenspan, Chairman of the US Federal Reserve, who suggested that the threat of deflation was not as great as many feared. Mr Greenspan’s comments hit hopes that the Fed would step in and buy bonds to reflate the economy, forcing investors to reconsider their positions.