Overview: U.S. bonds weekly primary and seconday markets update

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Overview: U.S. bonds weekly primary and seconday markets update PART 1 OF 8

U.S. Treasuries: Key drivers cause substantial yield curve moves

Secondary market for Treasuries is impacted by external drivers

Last week, the week ending June 6, most of the action in Treasury securities was concentrated in the secondary market. A slew of positive economic data releases, led by an improving labor market, saw Treasury yields increasing for maturities ranging from one year to 30 years.

Primary market activity was limited to weekly auctions for the one-month, three-month and six-month Treasury bills (or T-bills). ~$83 billion worth of T-bills were auctioned last week. The auctions have been analyzed in greater detail in the second part of this series. Announcements for this week’s Treasury auctions of three-year and ten-year notes and 30-year bonds (TLT) were also made last week, totaling $62 billion worth of coupon-paying Treasury securities.

Part 1

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Improving economy increases Treasury yields, spikes S&P 500 Index to record high

The U.S. economy added 217,000 jobs in May, which was good news for the consumption component of gross domestic product (or GDP). This was reflected in improving consumption indicators like higher year-over-year (or YoY) motor vehicle sales, increased credit card spending, and Gallup’s U.S. Consumer Spending Measure, which reached a six-year high. Chain store sales in May were also higher, compared to last year. The news from the manufacturing sector was positive as well. May Purchasing Managers Index (or PMI) readings and factory orders in April recorded better than expected increases. Initial jobless claims and the trade gap both recorded increases compared to their previous readings.

These positives resulted in the S&P 500 Index (SPY) touching a new high of 1949.44 on June 6—a 1.3% advance for the week. Increased trading activity in stock markets, also resulted in increased business for brokerages like Charles Schwab Corporation (SCHW) and E*Trade Financial Corporation. The stock price of Charles Schwab Corporation (SCHW), jumped ~3% over the week to $25.97 on June 6.

Bond (BND) yields usually increase as economic growth gains traction, which leads to a fall in bond prices. Treasury yields increased by 13 basis points (or bps) to 2.19% for seven-year maturities, the highest increase among Treasuries over the period May 30–June 6. 30-year Treasury yields (TLT) increased by 11 bps to 3.44%. However, yields for one-month T-bills declined by three bps on market expectations that the Fed funds rate hike wasn’t as imminent as previously expected.

European Central Bank rate move arrests slide in Treasuries

On Thursday, June 5, the European Central Bank (or ECB) announced a unique monetary policy measure—the ECB lowered its deposit rates for banks into negative territory. The ECB would now charge banks interest on reserves kept at the ECB at the rate of 0.1%—a monetary easing move designed to stimulate bank lending and economic growth in European Union (or EU) countries. EU countries have been plagued by low or negative economic growth for several years now, as well as low inflation.

U.S. Treasury yields had been increasing for six straight days leading up to June 5, with 30-year yields (TLT) rising to 3.45% on June 4, due to indicators that pointed to an improving U.S. economy. The ECB factor caused the increase in Treasury yields because demand for U.S. Treasuries increased on June 5, which raised their prices. The yield on ten-year Treasury bonds fell by two basis points to 2.59%, while the yield on 30-year Treasury bonds (TLT) fell by one basis point to 3.44% on June 5.

In this series, we’ll discuss primary and secondary market trends in the U.S. debt market, including Treasuries, high-yield debt (HYG), leveraged loans, and investment-grade corporate debt.

In the next section, we’ll analyze the T-bill auctions that took place for the week ending Friday, June 6. Please read on.


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