Traders work on the floor of the New York Stock Exchange.
NYSE
Stock traders do not normally talk about bond auctions, but this week, the ten-year treasury auction that takes place on Wednesday is the main topic of discussion.
“It’s been a long time since stock traders cared about auction auctions,” Matt Maley of Miller Tobacco told me. “The most important issue for the stock market right now is rates of return.”
This belief is widely held in the street: with the reopening story now largely priced in equities, interest rates are the marginal driver of the markets.
You could smell the panic among stock traders as the ten-year return in less than two weeks at the end of February moved from 1.1% to 1.5%, causing technological stocks to accumulate. Some bondholders have predicted that returns could move to 2%.
If further shares depend on rates, has it peaked? Treasury for ten years broke out more than 1.6% and failed. This gives some investors hope that the run-up is over.
Much depends on the outcome of Wednesday’s ten-year auction at 13:00 ET. Some stock bulls believe demand will be strong, especially from overseas buyers such as the Japanese, whose ten-year yields are at 0.1%.
Guy Lebas, chief strategist for fixed income at Janney Capital Markets, said foreign demand for U.S. treasury is strong and will remain so.
“What matters is the rate of increases rather than the actual returns,” he told me. “At the end of February and early March, our yields rose fairly rapidly, and this caused very poor digestion. If prices fall as they are, demand takes in more and slows down the process.”
This includes foreign buyers.
“A large portion of the U.S. treasury is owned by overseas entities. That’s about 40% of all outstanding treasury,” he told me. “Many of the buyers hedge currency risk, so what they care about is the returns after hedging. At the moment, you get 1.5% on the ten year, and you get 20 basis points on the currency hedge, so that’s 1.7%. “This is a very attractive return for foreign buyers. There is no place in the world where you can get 1.7% on a currency exchange.”
This is music to the ears of stock bulls, who also hope that one of the biggest concerns for rising securities – inflation – will also subside quickly.
“No matter what price increases we see for commodities, it’s because of the pent-up demand and because the supply chain is being stressed,” Alec Young, chief investment officer at Tactical Alpha, told me. “But when the equilibrium is back in line, you will see prices fall again. Price increases are due to the reopening, not the long-term inflation, and the bond market has reacted too much.”
Even Young still believes that the ten-year auction will be the most important car. “A lot of dealers will probably sit on their hands until the auction,” Maley told me.
And if the auction keeps rates close to the 1.5% level? That – for Alec Young – would be a sign that it’s much safer to go back to technology.
“Investors want to own technology,” he told me. “There is no deep loyalty to most reopening names. Nobody wants to conquer Carnival Cruise Lines or United Airlines or even Chevron. They want technology.”