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Good News At Bond Auctions

The recent auction of 20-year US Treasury bonds has provided a positive outlook for the bond market. Despite concerns about the timing of the auction, which took place on a Monday during a holiday-shortened week, the results were better than expected. The auction drew strong demand, as indicated by the slightly lower-than-expected yield.

The previous auction of 30-year bonds on November 9th briefly caused a decline in the market. However, the strong demand metrics of the 20-year bond auction have alleviated these worries, leading to immediate gains for buyers. Following the announcement of the auction results, the value of these bonds increased by 3 basis points, along with other long-dated yields. The auction saw a significant participation from indirect bidders, including foreign central banks, who were awarded the largest share of a 20-year bond auction since June.

Market experts have described this auction as a solid one, particularly in a nervous market. The successful outcome has provided a collective sigh of relief for traders and investors. It is worth noting that the 30-year bond auction did not perform as well, as yields in that sector had already been trimmed by half a percentage point from their October highs. However, the fact that these bonds are now trading at a profit indicates that investors are no longer hesitant to accept lower yields. Prior to the auction, there were concerns that a poor sale during the holiday-shortened week would dampen the recent rally in government bonds.

Answer To Poll: Note: when yields drop in bonds, this is actually good for bond holders, so bullish.

Following the auction, US stocks experienced a rally, with the S&P 500 approaching its highest level since August. The surge in demand for US government debt can be attributed to signs of slowing inflation and cooling economic growth. Traders and investors have been rushing into these bonds, convinced that the Federal Reserve has finished raising interest rates and will instead begin cutting them by the middle of next year.

Overall, US Treasuries have performed well this month, gaining 2.6% and reducing their losses for the year to just 0.2%. It is worth noting that the Treasury Department reintroduced 20-year bonds in May 2020 after a hiatus of more than three decades. These bonds have been trading at a discount compared to other long-term maturities, indicating relatively weak demand. While the auction results are positive, some experts caution that they may not fully reflect the underlying demand for longer-term bonds. However, the successful auction has provided a boost to market sentiment and suggests that there is still strong interest in US Treasury bonds.

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Consumer Sentiment

The recent release of the University of Michigan consumer survey, show that U.S. consumers' inflation expectations rose for a second consecutive month in November. Households anticipate inflation accelerating to 4.5% over the next year, up from 4.2% in October and 3.2% in September. Over a five-year horizon, consumers now see inflation running at an average of 3.2%, up from 3.0% in October and 2.8% in September. This is the highest since a matching reading of 3.2% in 2011.

However, other measures of inflation expectations have shown moderation, indicating a divergence in consumer sentiment. The New York Fed survey of consumers showed easing inflation expectations over both one-year and five-year horizons. This discrepancy suggests that consumer sentiment is not uniform and is influenced by various factors.

Home Sales

The housing market is another critical component of the economy. In October, home sales sputtered to their slowest pace in 13 years due to rising mortgage rates squeezing buyers and sellers out of the market. Previously owned homes were sold at a seasonally adjusted annual rate of 3.79 million, marking a 4.1% decrease from September's pace and the lowest rate since August 2010.

However, there are signs that brighter days could be around the corner for the housing market. Mortgage rates measured weekly by Freddie Mac have dropped by 0.35 percentage points since the final week in October, stirring up more interest in buying a home. Demand for home purchase loan applications measured weekly by the Mortgage Bankers Association has increased for two straight weeks. Economists expect that mortgage rates will fall in 2024, which could spur more buying.

Jobless Claims

Jobless claims counts the number of people filing to receive unemployment insurance benefits. Initial claims for state unemployment benefits dropped 24,000 to a five-week low of 209,000 for the week ended Nov. 18. This decline more than reversed the jump in the prior week, which had lifted claims to a three-month high. However, unadjusted claims rose 21,239 to 238,677 last week, with significant increases in filings in several states. Unadjusted claims have risen to their highest level since summer, and the number of people collecting unemployment benefits in the U.S. has increased for the first time in eight weeks. This suggests that it may be taking longer for people to find new jobs.

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