Macro

$39B Treasury Sale Spurs Rate Cut Hopes, Yields Dip

$39 billion Treasury sale boosts bond demand, US 10-year yields fall to 4.40% amid rate cut speculation.

By Athena Xu

6/11, 19:05 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Apple Inc.
Bank of America Corporation
Citigroup, Inc.
HSBC Holdings, plc.
JP Morgan Chase & Co.
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Key Takeaway

  • Strong demand in a $39 billion Treasury sale led to a decline in US 10-year yields by six basis points to 4.40%, hinting at potential Fed rate cuts.
  • Asian equities are set for losses, with Chinese stocks hitting a six-week low, while the S&P 500 and tech stocks like Apple Inc. reached new highs.
  • Investor sentiment is divided; HSBC strategists suggest buying dips amid short-term pullbacks, driven by uncertainties around interest rates and economic data.

Bond Strength Hints at Rate Cut Expectations

The bond market saw a surge in demand following a robust $39 billion Treasury sale, fueling speculation that an upcoming inflation reading could bolster the case for Federal Reserve rate cuts this year. The bid-to-cover ratio of 2.67 in the auction of 10-year debt, the highest since February 2022, led to a decline in US 10-year yields by six basis points to 4.40%. This positive bond performance reflects market expectations for potential rate adjustments in response to economic conditions.

Equities Face Mixed Signals

While the S&P 500 reached a new high and tech stocks like Apple Inc. soared, Asian equities are poised for early losses in Japan, Hong Kong, and Australia. Chinese stocks are also under pressure, with the CSI 300 Index closing at its lowest in over six weeks due to economic concerns. Despite Oracle Corp.'s strong performance, banks like JPMorgan Chase & Co. and Citigroup Inc. faced downward pressure. Traders are now awaiting key inflation data and the Fed's decision, highlighting the market's sensitivity to upcoming economic indicators.

Investor Sentiment and Fed Expectations

Investor sentiment remains divided, with a survey indicating that most investors anticipate a "risk on" scenario for both the consumer price index and the Fed decision. The expectation of a Fed rate cut is driven by perceptions of a soft landing and inflation trending towards a Fed-friendly level below 3%. As the Fed prepares to announce its decision, uncertainty looms over officials' quarterly rate projections, known as the "dot plot," adding to market volatility.

Tactical Opportunities Amidst Uncertainty

HSBC strategists suggest that sentiment and positioning indicators point towards a potential short-term pullback in stock markets, influenced by uncertainties surrounding interest rates. Despite this, they recommend buying any dips, anticipating a brief and shallow weakness in risk assets. Bank of America Corp. clients have shown increased interest in US equities, with retail investors and hedge funds leading net buying activity, signaling a continued bullish bias in the market.

Street Views

  • Peter Boockvar, The Boock Report (Cautiously Optimistic on the US Treasury market):

    "The US Treasury market is finally smiling after many, many months with at best mediocre auctions. Is the market sniffing out a softer CPI?"

  • Dennis DeBusschere, 22V Research (Bullish on Fed rate cuts due to soft landing):

    "63% of investors believe that the Fed will first cut because of a soft landing and that inflation is on a Fed-friendly path toward sub-3%, so there will be a cut because policy doesn’t need to be as restrictive."

  • Anthony Saglimbene, Ameriprise (Neutral on potential Fed rate cuts):

    "We expect Fed Chair Powell and company to maintain a position that stresses potential rate cuts remain contingent on the committee seeing further progress made on bringing down price pressures."

  • HSBC Strategists including Duncan Toms and Max Kettner (Bullish on buying dips in risk assets):

    "We’d expect any weakness in risk assets to be both short-lived and shallow, and we think this presents a pretty good tactical (re-)entry point."

  • Chris Senyek, Wolfe Research (Bullish on markets despite mixed signals):

    "Despite mixed signals coming from technical indicators, economic data, inflation and global central banks, markets remain biased to the upside. Investors’ ‘can’t lose’ attitude will persist for the foreseeable future on the belief that either the economic outlook is going to improve, and/or the Fed will cut."