U.S. Economy Can’t Muster a Win Big Enough to Derail Treasuries

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The lesson for investors backing higher Treasury yields this week was clear: A good growth story is no match for the virus-related fears gripping the market.

It will be tough for the U.S. economy to serve up numbers much stronger in the coming days than what investors just saw. Yields did climb more than 15 basis points from the week’s lows on surprisingly healthy manufacturing and services data, but the move had lost stamina by the time of Friday’s robust payrolls report. The world’s borrowing benchmark rate is stuck around 1.6% and probably tilted lower barring assurances from health authorities that the deadly coronavirus is under control.

While inflation dominates the coming week’s economic news, Treasury investors probably aren’t going to worry about any pickup in price pressures until the Federal Reserve does. And testimony from Chairman Jerome Powell is unlikely to signal any change in the central bank’s patient stance — he’s far more likely to highlight rising global risks.

“It’s clear there’s a downward bias in yields, and until we have some scare in inflation I think that stays,” said David Kelly, chief global strategist at J.P. Morgan Asset Management. “The coronavirus may dampen global commodity prices, so if anything it takes a little wind out of the sails of inflation.”

As for data that may dent Treasuries in the coming week, retail sales and consumer sentiment are forecast to show the foundations of the record U.S. expansion remain intact. And while a heavy freight of supply might normally pressure yields higher, Priya Misra at TD Securities reckons the current appetite for government securities can easily absorb the combined $84 billion of 3-, 10- and 30-year debt ahead next week.

Cap on Yields

Misra, global head of rates strategy at TD, says that until the Fed shifts to a more hawkish stance, the 10-year yield is capped at 1.7%, leaving it more room to fall than to rise.

Equities markets may bring more suspense, as indexes near all-time highs could be vulnerable to disappointments in the coming crop of earnings, Misra says.

“I look at profit margins and they’re declining — if we get an earnings scare, I think this story unravels,” she said.

The apparently blithe mood in stocks — at least until Friday’s declines — may be more consistent with the strength in Treasuries than it seems, if it’s based on the assumption of Fed support, in Misra’s view. That would also gel with the rates market’s pricing for more than a full rate cut as soon as September. The Federal Reserve Board said this week that the outbreak presented a “new risk” to the economic outlook for the U.S.

“The reason equities can do well is the Fed has essentially told us if things are bad they’ve got our back, and if things are good they’ll let it run,” Misra said. “I think we’re pricing in this Fed put.”

What to Watch

  • Traders will also be watching the results from Tuesday’s New Hampshire Democratic primary for the latest read on which candidate is ascendant
  • The New York Fed will release new schedules on Feb. 13 for Treasury purchases and repo operations
  • Here’s the economic calendar:
    • Feb. 11: NFIB small business optimism; JOLTS job openings
    • Feb. 12: MBA mortgage applications; monthly budget statement
    • Feb. 13: Consumer price index; jobless claims; real average earnings; Bloomberg consumer comfort
    • Feb. 14: Import/export prices; retail sales; industrial production; capacity utilization; Bloomberg U.S. economic survey; business inventories; University of Michigan sentiment
    • Feb. 10: Governor Michelle Bowman; San Francisco Fed’s Mary Daly; Philadelphia Fed’s Patrick Harker
    • Feb. 11: Daly; Powell addresses the House Financial Services Panel; Vice Chairman Randal Quarles; St. Louis Fed’s James Bullard; Minneapolis Fed’s Neel Kashkari
    • Feb. 12: Harker; Powell before Senate Banking Panel
    • Feb. 13: Senate panel holds hearing for Fed nominees Judy Shelton, Christopher Waller; New York Fed’s John Williams
    • Feb. 14: Cleveland Fed’s Loretta Mester
    • Feb. 10: $45 billion of 13-week bills; $39 billion of 26-week bills
    • Feb. 11: $30 billion 56-day cash management bills; $38 billion of 3-year notes
    • Feb. 12: $27 billion of 10-year notes
    • Feb. 13: 4-, 8-week bills; $19 billion of 30-year bonds

    — With assistance by Alex Harris

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