Weekly update: US Treasuries' primary and secondary markets (Part 1 of 8)
Robust demand for U.S. Treasuries
In the primary markets, the U.S. Treasury auctioned $171 billion worth of debt in the week ending August 15. Both short-term Treasury bills and longer-term Treasury notes and bonds (TLT) were auctioned. Overall, demand was robust, with strong bidding evident from both domestic and overseas investors.
Demand for US sovereign debt trends higher
The U.S. Treasury auctioned $67 billion worth of longer-dated debt securities last week. The continuous geopolitical uncertainties in Russia, Ukraine, and the Middle East—Iraq and Gaza—boosted demand for these securities. Comparatively lower yields in Eurozone (VGK) countries also made it advantageous for investors to purchase higher-yielding U.S. Treasuries, providing upside to U.S. Treasuries demand.
Hiccups surface in economic recovery
Besides overseas demand, economic data falling short of expectations also spurred demand for Treasuries last week. July retail sales were disappointing and so were the quarterly earnings of the world’s largest retailer, Walmart. The company’s results in its most important market, the U.S., fell short of expectations. This was capped by the head of Walmart’s U.S. operations, Bill Simon, being replaced.
Walmart’s results represent one of the most significant retail indicators , particularly for clocking the consumption habits among middle- and lower-income Americans. Walmart is part of the State Street SPDR S&P 500 ETF (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA).
Initial jobless claims, which measure the number of first-time applicants for unemployment insurance benefits, increased to 311,000. This was higher-than-expected.
Both retail sales and labor market data are key consumption indicators. Consumption makes up over two-thirds of the U.S. economy. Adverse data would impact gross domestic product (or GDP) growth in the third quarter. A setback in economic growth would imply that the Fed would be reluctant to raise the Fed funds rate anytime soon.
Also, demand for U.S. investment-grade debt (BND) usually increases when economic growth flags, as the asset class is considered a safe haven. So, this demand causes bond prices to increase. Bond yields fall as prices increase. The Vanguard Total Bond Market ETF (BND) invests primarily in U.S. investment-grade debt, both corporate and U.S. Treasuries.
The Vanguard FTSE Europe ETF (VGK) has holdings in equities in major European markets. The iShares 20+ Year Treasury Bond ETF (TLT) tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index. This measures the performance of U.S. Treasury securities that have a remaining maturity of at least 20 years.
The next part of the series will discuss how the Fed’s policy and the release of its July Federal Open Market Committee (or FOMC) minutes are expected to influence U.S. Treasuries.
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