Treasuries fell after the US government signaled that larger auction sizes are on the horizon, while signs of economic resilience hurt the odds a Federal Reserve interest-rate cut in December.
Treasury Department officials, unveiling their plans for financing the US government deficit over the November-to-January period, said they'd begun "to preliminarily consider future increases," even as they continue to anticipate no changes to note and bond auction sizes "for at least the next several quarters." The prospect of cuts to long-maturity auction sizes has been a minority view on Wall Street over the past year.
The selloff deepened after a gauge of services activity in October was stronger than economists estimated. Yields across maturities rose as much as six basis points, with the longest-maturity tenors rising the most. Ten- to 30-year yields reached the highest levels since Oct. 9, at 4.14% and 4.73% respectively.
READ MORE:
"The rates market likely reacted to the additional guidance that Treasury is thinking about thinking about future increases to nominal coupons," said Angelo Manolatos, a strategist at Wells Fargo. "This guidance pretty much takes coupon cuts off the table and creates a risk Treasury may even increase sizes as early as November 2026."
In addition to weakening outright and relative to shorter-maturities, long-dated Treasuries cheapened relative to interest-rate swaps, an alternative source of fixed-rate payments.
The supply announcement followed on the heels of ADP Research data showing employment at US companies increased by more than forecast in October. In the absence of Labor Department employment data — among the releases postponed by the US government shutdown that began Oct. 1 and is the longest on record — investors and Fed policymakers are relying more heavily on other sources such as ADP.
"This employment report should serve to alleviate the Federal Reserve's apprehensions regarding labor market deterioration," said Florian Ielpo, head of macro, multi asset team at Lombard Odier Asset Management. He sees a trading range between 4.00% and 4.25% "for an extended period."
Subsequently, the ISM services gauge increased more than expected to the highest level in eight months.
Signs of strength in the US economy have eroded expectations that Fed policymakers will cut interest rates for a third straight time when they meet in December. A quarter-point rate cut on Dec. 10 — which was fully priced into related swap contracts as recently as mid-October — is considered less likely than a pause.
After the Fed cut rates in September and October in response to signs of weakness in the labor market, Chair Jerome Powell and several other Fed policymakers have said that a cut in December could allow inflation pressures in the US economy to gain traction.
