Treasuries fall after ‘weak’ auction of seven-year note

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Wall Street stocks eked out small gains on Thursday, while a “weak” auction of new US government debt renewed a sell-off in longer-dated Treasuries.

The S&P 500 reversed earlier declines in afternoon trading to close 0.5 per cent higher, while the Nasdaq Composite clawed back its losses and rose 0.1 per cent

Treasuries also came under pressure, with the benchmark 10-year note rising 0.03 percentage points at one point to 1.64 per cent after the US Treasury department struggled to sell $62bn worth of seven-year securities.

It offloaded the debt at a yield of 1.3 per cent, slightly higher than the 1.275 per cent yield seen before the auction. The bid-to-cover ratio, which tracks the value of bids received relative to the amount accepted, slipped to 2.23 per cent, below the 2.28 per cent average for the previous six auctions.

The auction, which Ben Jeffrey at BMO Capital Markets characterised as “weak”, follows a spate of large Treasury sales that have captivated investors. After a grim seven-year auction in February, which set off a bout of chaotic trading, fund managers and strategists have become increasingly concerned about the market’s ability to absorb enormous blocks of new debt at a time when investors have already soured on Treasuries.

Yields, which rise as prices fall, have moved substantially higher since the start of the year against the backdrop of a brighter economic outlook and in turn, higher inflation. Inflation is a particular concern for certain investors, as it erodes the real value of the fixed payments bonds provide. The yield on the 10-year Treasury later fell back to 1.62 per cent.

Global stocks were mixed on Thursday. After registering losses for most of the day, the Stoxx Europe 600 equity index closed only 0.1 per cent lower. Germany’s Xetra Dax rose 0.1 per cent and the UK’s FTSE 100 lost 0.6 per cent, with the resources-heavy index dragged down by shares in energy producers. In Asia, Hong Kong’s Hang Seng index and the Shanghai Composite both closed 0.1 per cent lower, while Tokyo’s Nikkei was up 1.1 per cent and the S&P/ASX 200 in Sydney nudged 0.2 per cent higher.

European bourses fared slightly worse than the blue-chip S&P 500 because of divergent outlooks for the regions’ economies based on their progress in delivering Covid-19 vaccines.

The US has now administered more vaccine doses than any other country. Continental Europe, however, is mired in tensions over vaccine supply amid a delayed rollout of the jabs and intensifying lockdowns across the bloc. On Wednesday evening German chancellor Angela Merkel reversed course on a contentious Easter shutdown, in a move that underlined growing doubts about the country’s handling of the pandemic.

In a further sign of a recovering US economy, data released on Thursday showed US jobless claims had fallen to their lowest level since the pandemic began.

“Activity in the US seems poised for strong growth over the remainder of the year, fuelled by the tailwind of vaccinations and unprecedented fiscal stimulus,” said Christian Keller, economist at Barclays. “We expect Europe to catch up on vaccinations over the next two quarters, but it inevitably will delay its recovery.”

Maya Bhandari, multi-asset portfolio manager at Columbia Threadneedle, said the Stoxx 600 had enjoyed a “good run”, hitting 424 points on March 17, just shy of its pre-pandemic record high. She added that the third wave of the virus in Europe meant “we are stopping to take stock and really seeking to point our portfolios where we see the best earnings growth coming through, and that leads us to Asia and the US”.

The price of Brent crude, the international oil benchmark, fell 4 per cent to below $62 a barrel following a more than 6 per cent gain on Wednesday after the Ever Given, one of the world’s largest container ships, ran aground and blocked the Suez Canal. That rally proved temporary as the worsening virus situation in Europe clouded the outlook for global fuel demand.

The dollar, as measured against a basket of currencies, added 0.3 per cent to hit its highest level since November.

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