The bond market may have sniffed out a cooler CPI ahead of today's release. The reaction post-data has been uninspiring with US 30s trading at 4.20%, up 2.1 bps on the day following a week of steady declines.
ackman
The next move will be driven by today's $23 billion 30-year auction. Yesterday the US sold 10s at 3.999% and I think that's telling: The market wants those 4% yields.
Bill Ackman loudly bet on rising yields last week but it's not going his way as real money demand continues to build on an expected peak in Fed funds.
In their preview from today's auction, BMO notes there is already a concession built into the bond market for supply and that even with lower yields this week, the 30-year sale will clear the November 2022 peak of 4.08%.
So the headline from the sale will be that the US paid the most in years for debt but the real story may be that it pays less than feared.
"We expect there will be solid dip-buying interest for 4-handle 30s at a time when the inflation data is more consistently conforming with the Fed’s objectives," BMO writes.
Importantly, the last time the US sold 30s above 4%, the market was expecting 4.113% and it came in at 4.080% in a huge surprise and the biggest stop through in a decade. In the aftermath of that sale, 30-year yields fell 40 basis points and here's what happened to USD/JPY:
The S&P 500 also rallied 160 points:
Now the market isn't as sensitive to inflation as it was 9 months ago but if the yield at the auction is low, this is directionally correct.
One caveat though: This is new issue bond and BMO notes that they've tailed in 13 of the past 17 auctions by an average of 1.6 bps. August is also seasonally negative for auctions with 10 of the past 14 tailing. Moreover the size of the auction is up to $23 billion compared to $21 billion last November and this is the first sale since Moody's downgrade.
