The Daily Prophet: Bond Traders Aren't Sure What to Believe

The good news is, the U.S. Treasury was able to dump $258 billion -- with a "B" -- of debt on traders this week without blowing up the bond market. The bad news, though, is that there was no evidence that some of the highest yields since 2011 and earlier are high enough yet to really attract the type of demand that would prevent the cost to borrow from continuing to rise.

This week's auction-thon was capped by the sale Thursday of $29 billion in seven-year notes. Investors placed bids for 2.49 times the amounts offered, below last month's so-called bid-to-cover ratio of 2.73 times for that maturity despite a yield of 2.84 percent -- the highest since 2011. This week's glut of supply is a prelude to what's ahead as the government seeks to raise cash to make up for the lost revenue from tax cuts and bigger budget deficits. Overall, the U.S. is forecast to at least double its debt sales this year to more than $1 trillion, the most since 2010. What makes that number even scarier to traders is that the Federal Reserve is simultaneously pulling back from that market, reinvesting fewer of the maturing proceeds from its holdings in new bonds.

Even with the back up in yields in recent months, more and more bond dealers are advising their clients to approach the market cautiously. Before Thursday's auction of seven-year notes, the strategists at JPMorgan wrote in a research note that "valuations look rich" for that maturity. The strategists at Citigroup said they turned more bearish, lowering their Treasuries position to "neutral" on deteriorating supply dynamics, still depressed real rates and a potential “paradigm shift” should 10-year Treasury yields break above 3 percent.

STOCKS SETTLE INTO A CONCERNING PATTERN
In what is turning into a concerning trend, the Standard & Poor's 500 Index surged in early trading, only to give up most or all of its gains in late in the day. The benchmark rose as much as 1.11 percent on Thursday before ending the day little changed at up 0.1 percent. It appears that the benchmark is stumbling on a technical resistance level of about 2,750, according to Bloomberg News' Elena Popina and Sarah Ponczek. “The markets need to figure out which way they want to go next, and judging by the S&P’s performance in the past few days, it has little clue,” Donald Selkin, the market strategist at Newbridge Securities, told Bloomberg News. At least equity strategists are keeping the faith, as not a single year-end forecast has budged amid all the turbulence this month, Ponczek reports. In fact, the average forecast for the S&P 500 at year’s end increased to 2,940, as Chris Harvey, head of equity strategy at Wells Fargo, upped his projection, according to data compiled by Bloomberg. “It sounds boring almost to say, but no deterioration in fundamentals indicated not much change,” John Stoltzfus, the chief investment strategist at Oppenheimer, who kept his year-end forecast at 3,000, told Bloomberg News.