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Must-know US Treasuries update: Why the bull-run continued

Phalguni Soni

Must-know US Treasuries update: Why the bull-run continued (Part 1 of 7)

Treasury yields decline as Iraq, Q1 GDP numbers prompt a move to safer assets

The week ended June 27 saw the Treasury yield curve flattening slightly, with yields on two-to-30-year maturities declining over the week. The difference between 30-year (TLT) and five-year Treasury (IEI) yields decreased by one basis point over the week, to come in at 172 basis points on June 27. Thirty-year Treasury yields declined the most, by 8 basis points over the week, to 3.36% on June 27.

The decrease in yields was primarily due to geo-political tensions in Iraq and the sharp revision in Q1 GDP growth figures. The Bureau of Economic Analysis released the third and final estimate for Q1 GDP on Wednesday, June 25. U.S. GDP shrank 2.9% in the first quarter, a major downward revision from the 1% decline that was reported earlier in the second estimate.

Also on Wednesday, the U.S. Census Bureau reported a 1% decline in durable goods orders in May. Durable goods consist of items that last three or more years. These orders have multiplier effects on production and sales in other manufacturing industries as well.

These factors raised concerns on economic growth prospects for the remainder of the year. They resulted in a flight to safety to investment-grade bonds (BND).

Stock markets shrug off revision

The S&P 500 Index (VOO) took the revision in GDP in stride, increasing by 0.5% on June 25. The effects of the polar vortex, combined with revisions in healthcare spending, dampened consumption figures in the first quarter. Other revisions to GDP included inventories investment and import and export numbers. Stock markets appear to have factored in the revision and appeared to be buoyant on positive new home sales data for May that released on Tuesday.

Primary market issuance

Last week, a total of $205 billion worth of Treasury securities were auctioned in the primary market. These included auctions for both Treasury bills and Treasury notes for $98 billion and $107 billion, respectively. T-notes (IEF) pay a semi-annual coupon. T-bills are issued at a discount to be redeemed at par value on maturity.

Auctions for coupon-paying debt, held monthly, included the two-year, five-year, and seven-year note auctions as well as the monthly auction for two-year floating-rate notes. The US Treasury also auctioned $98 billion worth of T-bills, including the monthly one-year T-bill (SHY) auction.

We’ll analyze these in greater detail in the following parts of this series.

Continue to Part 2

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