Government bonds under renewed pressure after weak Treasury auction

US equities rose and global bond markets weakened on Friday as investors reckoned with a tepid Treasury auction result and data showing a rush to cash after weeks of volatile trading.

The blue-chip S&P 500 index climbed 0.5 per cent at the opening bell, while the technology-focused Nasdaq Composite added 0.3 per cent.

Yields on the US 10-year note gained 0.06 percentage points to 1.67 per cent, the highest mark since Monday, as investors sold the debt. The move higher in yields began late on Thursday after the US Treasury department struggled to sell $62bn worth of seven-year securities.

“The weak seven-year auction is a timely reminder that the backdrop points to higher rates,” ING analysts said.

Investors have been wary of the inflation risk that comes with holding government bonds, as President Joe Biden’s vast stimulus plan raises expectations that the US economy will run hot.

Blake Gwinn, head of US rates strategy at NatWest Markets, said the auction was “not a good sign for demand”, but compared with the “disaster” of the previous seven-year auction in February, which rekindled fears about the health of the $21tn US government bond market, it was something of a “relief” for investors.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, characterised demand as “uninspired but not horrific”, adding that the sale “provided little definitive evidence of either flagging sponsorship for Treasuries or an indisputable vote of confidence”.

Traders ploughed $45.6bn into cash funds in the week to Wednesday, the largest flow since April 2020, according to Bank of America research based on EPFR data. The report also showed $1.8bn flowing into Treasury Inflation-Protected Securities, the third-largest influx on record, as investors continued to position for higher US price growth.

European government bonds weakened, with yields on the German and UK 10-year securities both rising about 0.04 percentage points.

Elsewhere on the continent, stocks climbed. The region-wide Stoxx Europe 600 rose 0.9 per cent in the afternoon and the UK’s FTSE 100 was 0.8 per cent higher.

“I think what’s interesting in Europe is the contrast between equity markets and health woes,” said Sebastian Mackay, multi-asset fund manager at Invesco, adding that recent economic data suggested that Europe’s economies continued to grow despite faltering rollouts of Covid-19 vaccinations.

“We’re probably in a cyclical upswing for equities,” said Mackay. “The rise has been fuelled by the prospect of the reopening of the global economy, but valuations are already quite stretched.”

Oil markets remained unsettled as efforts to unblock the Suez Canal and restore global trade routes continued to face difficulties.

Paola Rodríguez-Masiu, senior oil market analyst at Rystad Energy, said traders took the view that the canal blockage was “becoming more significant for oil flows and supply deliveries than they previously concluded”.

Brent crude, the international benchmark, rose 3.4 per cent to $64.08 a barrel, while West Texas Intermediate, the US marker, gained 3.9 per cent to $60.82 a barrel. 

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