By Sunny Oh
Treasury price fell Monday, and yields rose, as investors attempted to digest the potential impact of a glut of debt from the likes of Apple and Kraft-Heinz and a trillions in coming government paper set to hit the market soon, which could in toto lower prices for existing bonds. The focus on the coming deluge of offerings shifted attention away from elevated tensions between China and the U.S., which had earlier supported bond buying in the session.
What are Treasurys doing?
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% was down 0.5 basis point to 0.636%, but up around 4 basis points from its overnight low of 0.597%. The 2-year note rate /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y 0.00% fell 2 basis points to 0.182%, its lowest since September 2011, while the 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y 0.00% rose 1.7 basis points to 1.296%, its highest since April 14. Bond prices fall as yields rise.
What’s driving Treasurys?
Treasurys came under pressure on Monday’s session amid a deluge of corporate debt issuance. As part of the underwriting process, banks will sell Treasurys to hedge against a surge in interest rates. An unexpected increase in yields can hurt banks that have temporarily warehoused the bonds while they are lining up buyers.
Altria /zigman2/quotes/208895754/composite MO -0.07% , Kraft-Heinz /zigman2/quotes/203625533/composite KHC +0.06% , Amgen /zigman2/quotes/209157011/composite AMGN +0.36% and Starbucks /zigman2/quotes/207508890/composite SBUX -0.82% are among the companies that sold debt on Monday, with Apple’s /zigman2/quotes/202934861/composite AAPL -0.09% four-part debt deal drawing the attention of income-hungry investors.
Evidence of climbing tensions between the U.S. and China dampened investor sentiment in overnight trading, drawing investors into the perceived safety of government paper. In January, both sides had agreed on a phase one trade deal, appearing to reach a truce on their longstanding conflict, but news reports say the Trump administration is now looking to punish Beijing for its handling of the coronavirus outbreak.
The White House was weighing the use of new tariffs, with President Donald Trump saying import levies would be the “ultimate punishment” for China. And the Trump administration is ramping up its initiatives to move supply chains out of the world’s second largest economy, Reuters reported.
Investors also grappled with worries that a return to normal economic activity may take longer than expected. Purchasing managers’ indexes in April from Asia and Europe fell further into contraction territory, reflecting a sharp decline in factory activity.
In other news, the U.S. Treasury Department said it would borrow a record $3 trillion in the second quarter, twice what it borrowed in all of fiscal 2019. Investors could struggle to take down the surge in debt issuance, but so far, yields for government paper remain depressed as a global economic downturn feeds demand for safe-haven assets.
What did market participants’ say?
“Issuance is up because policymakers have done a lot. Those who need access to capital can get it,” said Lauren Goodwin, economist and multiasset strategist at New York Life Investments, in an interview.
“We have no clear tool for understanding the path forward, here, we have to expect as investors, fits and starts, in this back-to-work policy,” said Goodwin.