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Inside Markets — Treasury Refunding

Treasury Refunding

November 3, 2023

The pullback in bond yields has been the main driver behind the week-long relief rally in equities. The pullback in yields is largely attributed to this week’s somewhat easier Treasury refunding announcement and disappointing macro data. Today’s data keeps the trend in place after October payrolls and ISM services missed expectations.

October non-farm payrolls from the Establishment Survey came in at +150,000 vs. consensus for +180,000, while the Unemployment Rate ticked up to 3.9% after the Household Survey recorded a notable loss of -348,000 jobs. Wage growth decelerated on a YoY basis and a shortened workweek also resulted in slower average earnings growth. Today, Richmond Fed President Barkin said the labor market is now in a better place, and there’s some evidence that price setters are seeing declining power.

Ten-year Treasury yields have crossed below our first technical threshold of 4.73%, which increases our confidence that 4.99% was the cycle peak.  A sustained break below 4.48% would confirm a peak in yields.  This week’s Treasury refunding announcement, disappointing macro data and CTA short covering has taken 10-year yields to 4.55%.  At this point the wide gap between bond yields and their fundamental drivers is no longer apparent, so the next several basis points might be harder to come by.

Disappointing macro data and a coincident decline in bond yields has driven equity upside this week, but investors will eventually need to consider the growth implications.  Today’s Jobs Report, which operates with a lag is just the latest sign of slowing economic momentum.  In SPX terms, we look for the bond-yield relief rally to be capped at ~4430 as oversold conditions unwind and macro disappointments become a headwind.

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