Illustration: Rebecca Zisser/Axios
The Treasury held an incredibly weak auction of 2-year government debt Tuesday that saw primary dealers, who are essentially on clean-up duty, take home their highest share of the auction since December 2018.
What it means: Even though yields on the 2-year note have fallen by nearly 40 basis points this year, traders are convinced that there is "certainly more room for yields to fall," Ben Jeffery, rates analyst at BMO Capital Markets, tells Axios.
Why it matters: It's the latest evidence that the market is growing more certain the Fed will cut U.S. interest rates this year.
One level deeper: "As for the auction, it suggests that given how far and how fast the move has run, some primary market participants seem to be of the mind more attractive entry points could present themselves over the near term," Jeffery adds.
Another level deeper: The coronavirus outbreak has hurt the buying power of investors in Japan and China, who are direct bidders in U.S. Treasury auctions, a category of buyer that typically takes a substantial percentage.
- "Remember, one of the important reasons for foreign interest in U.S. Treasuries is that they invest the profits from the trade surplus they enjoy with the U.S.," DRW Trading rates strategist Lou Brien tells Axios.
- "But the virus has curtailed a lot of trade, and therefore [there are] fewer profits to invest."