Feb 26, 2020 - Economy & Business

Weak U.S. debt auction shows market sees even lower rates

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."

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The coronavirus outbreak could finally sink the dollar

Data: FactSet; Chart: Axios Visuals

The dollar is buckling under the weight of expected rate cuts from the Fed and record-low U.S. Treasury yields.

The state of play: It has fallen to its weakest level when valued against a group of global currencies since the beginning of the year, and experts think there could be much further to go.

Record low U.S. Treasury yields are expected to keep falling

Data: FactSet; Chart: Andrew Witherspoon/Axios

The yield on the U.S. 10-year Treasury note fell below 1% for the first time ever after the Fed's unexpected rate cut.

The state of play: This drop might not be the end. "We expect Treasury yields to remain low and perhaps fall even lower," Charles Schwab chief fixed income strategist Kathy Jones wrote.

Record low rates could exacerbate debt, housing issues

Illustration: Rebecca Zisser

The stock market selloff has drawn the most attention this week, but moves in the U.S. government debt market will likely have much more important impacts on the economy.

The state of play: Mass bond buying has taken place since the beginning of the year and picked up steam as headlines about the spread of novel coronavirus have grown more worrisome.