The Zhitong Finance App learned that as US Treasury bonds this month are on the verge of their worst performance since this year, a series of auctions will be a major test of whether the yield has peaked after the highest level in 2024.

Investors will have a tricky week, even beyond the risk of further volatility due to the tense situation in the Middle East. The market must absorb the total sale of 2-year, 5-year, and 7-year bonds worth $83 billion, of which the first two matures will reach record levels. Furthermore, a critical inflation data will be released this week, which will help shape expectations about the Federal Reserve's policy path.

There were signs this month that due to economic recovery, yields soared, causing traders to push back their bets on the Fed's interest rate cut until the end of 2024, which is already a strong indication that investors want to buy. After Federal Reserve Chairman Powell sent a signal last week that the Federal Reserve is not in a hurry to cut interest rates, the latest round of sharp decline in US debt once pushed two-year interest rates above 5%.

Now, the 5% level seems to be the magic number for bond managers seeking to invest in short-term bonds. For Jack McIntyre (Jack McIntyre) of Brandywine Global Investment Management (Brandywine Global Investment Management), Powell's information strengthened the signal that treasury bond prices may be bottoming out.

The portfolio manager said, “The Federal Reserve stands by its position and says 'we will break inflation', which means that yields will peak. If the Federal Reserve pulls back and cuts too soon, yields will soar.”

“Approaching arrival”

Two-year treasury bonds closed at around 4.99% last week, so Tuesday's auction is likely to reach a coupon interest of at least 5%, the first time since last year. Prior to that, investors had not seen this level for over a decade.

Michael Cudzil (Michael Cudzil), portfolio manager at Pacific Investment Management (Pacific Investment Management), said, “It's possible to get 5% interest in a two-year auction, and we're almost successful.”

He said, “The market has taken significant reduction measures. The current price is reasonable and can achieve quite a wide range of results. The company has been increasing interest rate investments, preferring the front end of US Treasury bonds and five to seven year terms.”

Of course, there is also a risk that the yield will continue to rise along the entire curve and reach its peak in October last year, when the yield on some term bonds had already exceeded 5%.

This is also the role of the Personal Consumer Expense Price Index (PCE) report, an inflation indicator favored by the Federal Reserve on Friday. The data is expected to show that the annual growth rate last month will rise to 2.6% from 2.5% in February, which will indicate that the Federal Reserve's progress towards the 2% target has stalled. Traders have taken notice of this after March consumer price data (CPI) surpassed expectations.

However, there is still plenty of evidence that demand is emerging. At the 20-year US Treasury bond auction held last week, the yield reached the second-highest level in history and was widely welcomed. Investors' net long holdings on US Treasury bonds are the highest in weeks, according to J.P. Morgan's latest customer survey.

Investors also note that the return of the 5% two-year coupon last year provided a buying opportunity. The yield then fell below 4.15% in January as the market was betting that interest rates would be cut as early as March.

Although traders now expect the Fed to wait until the fourth quarter to cut interest rates, the possibility of at least some easing this year indicates that there is still room for appreciation in the prices of the new two-year and five-year benchmark bonds.

Priya Misra (Priya Misra), portfolio manager at J.P. Morgan Asset Management (J.P. Morgan Asset Management), said, “Although two-year bond yields are lower than note yields and the CPI data is better than expected, interest rates of around 5% are still attractive because the basic situation of the Federal Reserve is still cutting interest rates.”

Furthermore, bond investors saw another potential source of demand for two-year bonds with an interest rate of 5%: money market funds. In last week's data, the cash piles in these funds plummeted, falling below $6 trillion, or tax-related.

But as two-year note yields approach the 5.25% to 5.5% range currently set by the Federal Reserve, retail investors may begin to realise the appeal of locking in this level until 2026.

BrandyWine's McIntyre said, “The process of moving from cash to partial fixed income will likely be phased, starting with a shift to products with a shorter term.”