A whole lot of debt will be auctioned this week, and it could add pressure to an already pressurized bond market.
First, there will be about $200 billion in Treasury auctions that began already on Sunday. These include offerings across the yield curve from three months all the way to 30-year bonds. Offerings will be much heavier towards the short end and very light at the long end -- $48 billion will be offered in three-month bills and only $13 billion of 30-year bonds. The significance of this is that because supply is rising at the short end relative to the long end, short term yields will continue rising faster than long term. This has been happening since 2014, and at a much faster rate since July of last year, flattening the yield curve.
Second, both the producer price index (PPI) and the consumer price index (CPI) numbers will be published this week. The PPI numbers will be available on Tuesday, and the CPI on Wednesday. While these two data series are well-known and receive pretty broad coverage, what is escaping the radar is Chinese CPI numbers that will also be published on Tuesday.
Why the PPI and CPI numbers for the U.S. are significant for the bond market is obvious. Higher inflation in the U.S. means higher interest rates for U.S. Treasuries. So why are China’s numbers important as well? Because higher prices in China means that the People’s Bank of China (PBOC) could try to prop up the yuan in response in order to quell consumer price gains. One of the ways that the PBOC can do this is to sell the dollar, which would also push up rates.
The reason why these upcoming Chinese inflation stats are especially significant is that the inflation rate in China jumped up to 2.9% year over year last month, the highest level in four years and a very sudden jolt. Another jolt like that and the PBOC may be forced to respond.
Third, the Congressional Budget Office is set to release its 10-year projections for the U.S. budget on Monday. The CBO has consistently underestimated actual budget deficits in the past, so its estimates could be seen as a lowball by bond traders. The estimates will at least put a ballpark number on what many consider will be multi-year trillion-plus annual deficits over the next decade. If the CBO officially admits to this, bond traders will probably expect the actual deficits to be even higher, dizzyingly above $1 trillion annually, not a good thing for Treasury prices.
Finally, there is an escalating situation in Syria with a suspected chemical attack by President Bashar Assad’s forces, and a response this morning that may have been initiated by Israel. Another spat between President Donald Trump and Russian President Vladimir Putin is not stabilizing for any market, and Putin has threatened retaliation if the U.S. makes a move in Syria. Although this is not directly connected to the bond markets, it just adds geopolitical volatility to what already looks as if it will be a particularly volatile week after the wild ups and downs of last week.
Disclosure: No positions.
