Bond Rally Flounders as $16 Billion Test in Sight: Markets Wrap

(Bloomberg) — The rally in the world’s biggest bond market toward its best month since March lost traction on Monday, with traders gearing up for a $16 billion sale of 20-year Treasuries.

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Wall Street continued to keep a close eye on debt auctions, especially after the US recently offered an unusually large premium to sell 30-year securities. A strong reception would be an endorsement of the November advance. And vice versa. Those sales have also been exerting a growing sway over stocks, underscoring how the path of rates is gripping markets of late.

Ten-year US yields rose, remaining below 4.5%. The S&P 500 rose toward its highest since August and the Nasdaq 100 was on pace for a 22-month high. Microsoft Corp. climbed after hiring OpenAI co-founders Sam Altman and Greg Brockman to lead its new advanced artificial-intelligence research team. Boeing Co. rallied on an analyst upgrade. The dollar was set for an 11-week low.

To Andrew Brenner, head of international fixed income at NatAlliance Securities, the 20-year Treasury supply in a holiday-shortened week is giving the market “indigestion” ahead of the sale.

“One potential catalyst that could shake up markets today is the 20-year Treasury bond auction,” said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. “Weak results could trigger a rebound in yields — especially given fading attendance this week and subsequently less liquid market conditions across asset classes.”

Following a more than three-decade hiatus, the Treasury Department resurrected 20-year bonds in May 2020. Since then, it has never sold the securities during the Thanksgiving week. The bonds have been trading at a discount to other long-term maturities — a sign of tepid demand.

“There’s good reason to believe 20s will be better received than this month’s 10s and 30s, but will respect the historical trends and look for a small tail,” said Ben Jeffery, a US rates strategist at BMO Capital Markets.

The “unsustainable state” of the fiscal budget is leading to a meaningful increase in Treasury issuance — and when combined with demand challenges — a higher-for-longer rate environment appears justified, according to Principal Asset Management.

“Treasuries offer extremely attractive yields,” the firm said. “And while the potential for capital appreciation might be limited in the face of an impending economic slowdown, the assurance of a steady income from Treasuries makes them a solid option for investors prioritizing stability heading into an uncertain 2024.”

Following softer-than-expected inflation data, the Bloomberg US Aggregate index — which tracks $25 trillion of investment-grade government and corporate debt — gained 1.4% last week and is up 0.5% for the year. The gauge posted a record loss of 13% in 2022.

Read: Yellen Says US Making ‘Considerable Progress’ Reducing Inflation

As the dollar rally stalled, it will take some firm real-sector data to challenge the current dovish Fed narrative, according to Win Thin, global head of currency strategy at Brown Brothers Harriman & Co.

“The US economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the market thinks,” Thin noted. “That said, the dollar remains vulnerable until we see a shift in market sentiment and expectations.”

To Solita Marcelli at UBS Global Wealth Management, the dollar should remain stable in the first months of 2024 due to robust economic growth and high interest rates relative to the rest of the world.

As the earnings season winds down, investors will also be on the lookout for results from a handful of retailers and tech companies.

Nvidia Corp.’s quarterly results could exceed sky-high investor expectations thanks to strong demand for generative artificial intelligence. Best Buy Co., Nordstrom Inc. and Lowe’s Cos. are set to post slumping sales, reflecting the consumer pullback in discretionary spending.

Read: Black Friday, Cyber Monday Spending Projected to Hit New High

To some market watchers, the S&P 500’s rally is looking increasingly unsustainable. Strategists tracked by Bloomberg predicted on average in mid-October that the gauge would end the year at 4,370 — but it is already been trading above 4,500.

Investors who believe that “Santa has come early” to markets may want to consider put-option spreads through year-end on companies like Expedia Group Inc., Carnival Corp., Nvidia and Intel Corp., RBC Capital Markets derivatives strategist Amy Wu Silverman wrote.

To power back to its previous peak, the S&P 500 needs more than just the earnings recovery that appears to be underway — rate cuts are necessary, too. That’s according to Bloomberg Intelligence’s fair-value model of the US stock benchmark, which says the consensus 2024 price target on the gauge looks too lofty.

The typical post-earnings recession rebound is expected to come against a backdrop of sustained higher interest rates. That’s likely to limit potential upside for the S&P 500 to around levels the gauge is currently trading at, even in the best-case scenario, based on projections by BI equity strategists Gina Martin Adams and Michael Casper.

“The market as a whole has not yet eclipsed its early-2022 highs, reflecting the push and pull between optimism for a Fed-engineered soft landing and the potential underestimation of economic headwinds,” said Jason Pride and Michael Reynolds at Glenmede.

Meantime, some of Wall Street’s top strategists are divided when it comes to Corporate America’s earnings outlook next year. While Citigroup Inc.’s Scott Chronert expects profits to hold up even if the economy slips into a recession, JPMorgan Chase & Co. strategist Mislav Matejka says diminishing pricing power would crimp overall revenue and margins regardless of whether growth contracts.

A Citigroup index shows downgrades to US earnings estimates have outnumbered upgrades for nine weeks in a row — the longest streak since February. Chronert does expect analysts’ estimates for 2024 to drop in the coming quarter — but that would only lower the bar for companies, he said.

“We remain positive on equities and expect a broadening of the rallies recently experienced as the US economy continues on a sustainable economic expansion albeit at a modest pace,” said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.

Read: Five Key Charts to Watch in Global Commodities This Week

Elsewhere, Germany is exploring a drastic overhaul of its federal budget for this year, including relaxing restrictions on net new debt, following last week’s ruling by the country’s top court, according to people familiar with the discussions.

The European Central Bank may have to raise borrowing costs again if investor bets on monetary loosening undermine the institution’s policy stance, Governing Council member Pierre Wunsch said.

In the commodity world, oil gained as traders waited to see whether the OPEC+ alliance led by Saudi Arabia will intervene to bolster prices. Spot gold declined after a weekly advance of more than 2%. Copper climbed as industrial commodities benefit from growing optimism for an end to the Federal Reserve’s rate hikes.

Key events this week:

  • ECB President Christine Lagarde and German Finance Minister Christian Lindner speak, Tuesday

  • US existing home sales, Tuesday

  • FOMC issues minutes from the Nov. 1 policy meeting, Tuesday

  • Nvidia’s earnings, Tuesday

  • Canada’s update to the government’s fiscal and economic outlook, Tuesday

  • Eurozone consumer confidence, Wednesday

  • US initial jobless claims, University of Michigan consumer sentiment, durable goods, Wednesday

  • Bank of Canada Governor Tiff Macklem speaks, Wednesday

  • Eurozone S&P Global Manufacturing & Services PMI, Thursday

  • Thanksgiving holiday — US markets closed — Thursday

  • ECB publishes account of October policy meeting, Thursday

  • Germany IFO business climate, Friday

  • US S&P Global Manufacturing PMI, Friday

  • Black Friday, traditional kick-off for the US holiday shopping season

  • ECB’s Christine Lagarde speaks, Friday

Some of the main moves in markets:


  • The S&P 500 rose 0.5% as of 12:22 p.m. New York time

  • The Nasdaq 100 rose 0.8%

  • The Dow Jones Industrial Average rose 0.3%

  • The MSCI World index rose 0.5%


  • The Bloomberg Dollar Spot Index fell 0.4%

  • The euro rose 0.3% to $1.0945

  • The British pound rose 0.4% to $1.2508

  • The Japanese yen rose 0.9% to 148.30 per dollar


  • Bitcoin rose 0.6% to $37,221.79

  • Ether rose 2.1% to $2,025.32


  • The yield on 10-year Treasuries advanced two basis points to 4.45%

  • Germany’s 10-year yield advanced two basis points to 2.61%

  • Britain’s 10-year yield advanced two basis points to 4.12%


  • West Texas Intermediate crude rose 2.8% to $78.04 a barrel

  • Spot gold fell 0.3% to $1,975.72 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Matthew Burgess, Tassia Sipahutar, Robert Brand, Elizabeth Stanton, Alexandra Semenova, Sagarika Jaisinghani, Vassilis Karamanis, Carter Johnson and Ye Xie.

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