Risk-averse buying fades, dragging down US Treasury yields, market focus shifts to the sale of billions of dollars in bonds

Zhitong Finance learned that as the global fervor for safe-haven assets cools down, US Treasury prices are falling, and market attention is now turning to the $58 billion short-term US Treasury auction, which will be the next test of investor demand. On Tuesday, the yield on the US 2-year Treasury note jumped 7 basis points to just below 4%. European bonds also experienced some declines, but to a lesser extent. The US Treasury Department will auction $58 billion of new 3-year US Treasury notes at 1:00 am Beijing time on Wednesday. This week's auction cycle also includes a $42 billion auction of 10-year US Treasury notes at 1:00 am Beijing time on Thursday, and a $25 billion auction of 30-year US Treasury notes at 1:00 am Beijing time on Friday.

This marks a rapid shift in market sentiment. Previously, signs of slowing US economic growth, coupled with intense selling of risk assets, led to speculation that the Federal Reserve would need to significantly cut interest rates to help the world's largest economy. On Monday, the yield on the US 2-year Treasury note fell by 20 basis points at one point.

Moreover, due to the decline in short-term yields, the yield on the US 2-year Treasury note fell below the 10-year Treasury note yield for the first time since July 2022, as concerns about an economic recession led traders to bet that the Fed would significantly ease monetary policy—thereby pushing down policy-sensitive short-term yields. On Monday, the yield on the US 2-year Treasury note fell by 23 basis points to 3.65%, below the 3.68% yield on the US 10-year Treasury note. In comparison, in March 2023, the yield on the US 2-year Treasury note was 111 basis points higher than the 10-year Treasury note yield, marking the deepest inversion since the early 1980s.

This is an important milestone for the US Treasury market. For most of the time since the Fed began raising rates 11 times (totaling over 5 percentage points) in March 2022, short-term US Treasury yields have been higher than long-term yields, creating an inverted yield curve.

Jack Janasiewicz, portfolio strategist at Natixis Investment Managers, said, "Sentiment is likely overdone. The evidence certainly points to an economic slowdown. But deceleration and stagnation are two completely different concepts."

Traders are also withdrawing their expectations for a significant rate cut by the Fed this year. Swap contracts show that the market is betting on a rate cut of around 110 basis points by the Fed this year, compared to a high of 150 basis points on Monday At present, the money market has ruled out the possibility of an emergency rate cut earlier this month.