US 10Yr bond auction could weaken USD support
Brisk recovery of risk assets on Tuesday, during which the Nasdaq recaptured almost half of the correction since February, gave way to more measured moves on Wednesday. Modest inflow into longer-maturity Treasury bonds caused the yield to retreat from local high of 1.6% to 1.54%. Yesterday's auction of 3-year Treasury notes was a moderate success allowing bond investors to collectively breathe out:
However, bond yields resumed modest upside on Wednesday which apparently curbs optimism in risk assets and offers solid support to US currency. SPX and Nasdaq futures sway near opening, European equities also lack buying pressure. The Dollar sell-off on Tuesday drove the currency’s index to the lower bound of the current ascending channel. Potential break in the trend channel today or tomorrow could put an end to the short-term bullish USD move:
Three key events that will determine the way forward in the near term are US inflation report, the $38 billion 10-year bond auction due today and the 30-year bond auction due tomorrow. Weak demand for long-term Treasury debt may cause new volatility in rates, which in turn could limit advance in equities, however, strong rebound of risk assets on Tuesday indicates that investors discount that risk. Tomorrow will be followed by an auction for 30-year bonds, which will be of interest for the same reasons. Key indicators that need to be monitored are bid-to-cover ratio (an indicator of strength of the demand), foreign sector demand and the actual yield at which the securities were sold.
US consumer inflation is expected to accelerate to 1.7%, core inflation to 1.4%. The focus is on core inflation as the broad inflation could easily beat forecast due to higher fuel prices and cold winters in several US states which implies more spending on heating. An upward deviation from the forecast in core inflation will likely support upward trend in the USD and will probably initiate additional sales in gold, since in such a case, instability may reemerge in the Treasury market, where recent sell-off were caused by rise in inflation expectations and real rate. Recall that the markets are now worried about a possible spike in inflation due to a combination of pro-inflationary effects from a real economic recovery + fiscal stimulus from the government. Therefore, investors are now especially sensitive to inflation data.
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