After a quiet couple of weeks in the bond market, activity will soon pick back up, thanks to a series of auctions and inflation data on the calendar.
The action kicks off with a U.S. sale of 3-year notes Monday at 11:30 a.m, followed by a 10-year note sale at 1 p.m. The bond-market news will really pick up on Tuesday, however, when consumer inflation data are published.
Inflation data will be a key focus for bond investors this year, as they try to gauge how much consumer prices will rebound from last year’s Covid-19 pandemic. Economists expect the Bureau of Labor Statistics to report a 2.5% year-over-year increase in the consumer-price index for March, with a 0.5% monthly rise.
While some commentators may focus on the fact that the headline figure exceeds the Fed’s long-term target of 2%, central-bank officials have adjusted their approach to inflation in recent years and believe any increase in inflation will be transitory because of calendar effects from last year. (CPI isn’t the Fed’s favored measure of inflation, either.)
The biggest question now is not whether the Fed will respond, but how much of the economic rebound is already reflected in market prices, after the 10-year yield has climbed nearly 75 basis points, or hundredths of a percentage point, this year.
That may start to become clear on Tuesday, in markets’ response to the CPI data, according to Goldman Sachs.If the index climbs faster than expected and Treasuries don’t decline substantially, that could indicate the bond market has been pricing in quicker growth than economists are forecasting—or that investors are confident the price increases will be short-lived. Same goes for Thursday’s advance report on March retail sales, where the Census Bureau is expected to report a 5.4% month-over-month jump in sales, after a drop of 3% the prior month.
“A tepid response to potentially strong CPI and retail sales reports would indicate that good news is in the price to a greater extent than we think,” wrote the bank’s strategists in an April 9 note.
If long-term bond yields do respond strongly to this week’s inflation data, that may put some pressure on the 30-year bond sale at 1 p.m. on Tuesday. But because of the calendar (the current results will reflect last year’s collapse in prices and economic activity) persistent concerns about inflation may not crop up until next month, or even later in the year. Strategists at Goldman Sachs argue in a recent note that Treasury yields will likely keep rising this year, but the selloff may start in the late spring and summer once there is a more persistent inflation trend.
“In this regard, we note that current data reflects the economy in March, and we would reserve judgment until April data are available (in May), given that sustained positive momentum in data could build support for the ‘overheating’ narrative, which we do not think is as yet priced,” the strategists wrote in an April 9 note. “As a result, we maintain our view that there’s room for further repricing higher in yields.”
Another factor that could attract investor attention this week is the next release of the Fed’s schedule of bond purchases. Usually this wouldn’t be a headline-grabbing event, but Lorie Logan, head of market operations for the New York Fed, hinted in an April 8 speech that the central bank may make small changes to the composition of its purchases.
“The aim is to better align the composition of QE to be relatively neutral to the Treasury debt outstanding so as not to affect market functioning,” wrote strategists at TD Securities in an April 8 note.
In other words, the central bank may signal plans to buy slightly more long-term debt to adjust for the increased amount of long-term Treasuries that will be sold, especially after the 20-year bond was introduced. The TD strategists found that the Fed has been buying a relatively small share of 7- to 20-year Treasuries, and may slowly pick up the pace of buying of those securities.
But this isn’t the explicit policy move to target long-term Treasuries that some on Wall Street had expected late last year. That would be a form of easing, and Fed officials have said they will consider such a move if needed. And with strong job creation and rebounding consumer prices, it may not be any time soon.
Find more details on the Fed’s purchase release plans below, along with other market-moving news, such as a speech from Fed Chairman Jerome Powell. Estimates are from Bloomberg and times are Eastern:
Treasury auctions: The U.S. will sell $58 billion in 3-year notes at 11:30 a.m., and at 1 p.m. will sell $38 billion in 10-year notes. Money-market economists at Jefferies noted that while steeper declines during Friday’s session would have made the sales more attractive, the two maturities are trading relatively cheap compared to other points on the Treasury yield curve, so there may be solid demand anyway.
Inflation data: The March consumer-price index is due out at 8:30 a.m. As mentioned above, economists expect a 2.5% year-over-year increase and a 0.5% monthly increase. Excluding volatile food and energy prices, the CPI is expected to rise 1.5%.
Treasury auction: The U.S. will sell $24 billion in 30-year notes at 1 p.m. While inflation is traditionally seen as hitting long-term bonds hardest, market pricing indicates that long-term inflation expectations have remained muted even as five-year market forecasts have jumped. That is a sign that investors don’t see runaway long-term inflation, and also should mean that long-term bonds aren’t too unpopular from here on out.
Mortgage applications: Investors have been watching weekly data on mortgage applications to see if the increase in Treasury yields is hampering demand for housing. While economists don’t provide estimates for this figure, applications fell 5.1% the week ended April 2. Data for the week ended April 9 will be published at 7 a.m.
Powell speaks: The Fed’s Powell will speak at an Economic Club of New York luncheon at noon.
Beige book: The Fed will release its beige book, its survey of local businesses and economists, at 2 p.m.
Clarida speaks: Fed Vice Chairman Richard Clarida speaks about the Fed’s new policy framework at 3 p.m.
Jobless claims: Economists expect 700,000 initial jobless claims for the week ended April 10, down from 744,000 the week before. The data is slated for 8:30 a.m.
Retail sales: As mentioned above, advance retail sales are expected to climb 5.4% in March, up from a 3% decline the month before. Excluding volatile auto sales, they are expected to rise 4.8% for the month. The data is due out at 8:30 a.m.
Housing starts: The Census Bureau is expected to report that new housing starts accelerated in March, to an annualized pace of 1.6 million, from 1.4 million the month before. Like the mortgage application data, investors will be watching to see if rising yields have hurt demand for housing. The data is due out at 8:30 a.m.
Consumer sentiment: The University of Michigan is expected to report that consumer confidence improved in March, with its reading forecast to rise to 89 from 84.9.