Treasury Auctions and Inflation Data

August 7, 2017

Treasury Auctions and Inflation Data Photo

Last week’s employment data confirmed the strength of the jobs market with 209,000 new jobs added during July versus an expected 180,000. The unemployment rate fell to a cyclical low of 4.3% while hourly earnings increased by 0.3% to a 2.5% year-over-year rate.

The coming week will be interesting from a bond market perspective, as two key events could impact the trajectory of prices which have ground higher recently. This week, the U.S. Treasury will auction off $24 billion 3-years on Tuesday, $23 billion 10-years on Wednesday and $15 billion 30-years on Thursday in its quarterly refunding. The auction comes as we grow closer to both the beginning of the Federal Reserve tapering its balance sheet and a potential government shutdown including debt default, both expected in September. Congress needs to raise the debt ceiling to avoid a default. I expect a deal to be put together, but given the dysfunction in Washington D.C., it may be last minute. It will be very interesting to see if demand for Treasury securities is impacted by these two events.

U.S. Treasury securities will also be impacted by the Consumer Price Index release on Friday. Prices are expected to increase by 0.2% for the month and 1.8% year-over-year, moving inflation closer to the Fed's target of 2%.

My expectation is for auction demand to be on the light side and inflation to meet expectations. Under this scenario, I expect longer term Treasury yield to move to the upside.

Tags: Monday Morning O'Malley | Bonds | U.S. economy | Federal Reserve | CPI | Employment numbers | Treasury yields | U.S. Treasuries

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