Investor sentiment underwent a notable transformation as the fervent demand for safe-haven assets that characterized the beginning of the week subsided on a global scale. The market’s attention has now shifted towards a forthcoming $58 billion auction, anticipated to serve as a pivotal gauge of investor interest. Yields demonstrated an upward trajectory across the curve on Tuesday, with the two-year rate ascending by seven basis points to hover just below 4%. While European bond markets also experienced declines, the magnitude of losses remained relatively subdued. The US Treasury is slated to conduct the sale of new three-year notes at 1 p.m. Eastern Time.
This swift reversal in market sentiment follows indications of decelerating economic growth and a turbulent sell-off in high-risk assets, sparking conjecture regarding the necessity for the Federal Reserve to implement substantial interest rate cuts to bolster the world’s largest economy. At one juncture on Monday, the two-year yield plummeted by 20 basis points.
Jack Janasiewicz, a portfolio strategist at Natixis Investment Managers, remarked, “Sentiment may very well be overshooting. Evidence undoubtedly indicates a slowing economy. However, slowing down and being slow represent distinct junctures.”
Moreover, traders are recalibrating their expectations concerning the extent of rate reductions by the Fed within the current year. Market swaps currently indicate a potential easing of approximately 110 basis points throughout the year, in contrast to the speculated 150 basis points as of Monday. Notably, the possibility of an emergency rate cut as early as this month has been discounted by money markets.
This week’s auction cycle encompasses a $42 billion 10-year auction scheduled for Wednesday and a $25 billion 30-year new issue slated for Thursday. These auctions are poised to provide further insights into investor sentiment and demand dynamics as the market landscape continues to evolve.
