US Treasury yields stayed buoyant amidst a relatively hawkish set of Fed minutes and weak 20Y auction. Fed minutes were probably outdated given that the FOMC meeting took place before the latest CPI and PPI prints that surprised on the upside. However, the language was probably skewed on the hawkish side to soften speculation of aggressive rate cuts and to forestall easing in financial conditions. The key takeaway from the minutes was that most officials were worried about the risks of easing policy too early. This turned out to be prescient amidst the string of firm US data in January.
Later in the trading session, the 20Y saw a lower bid-to-cover ratio of 2.39% (from 2.53% previously). More importantly, the issue was awarded at 4.60%, some 3bps higher than the when-issued yield. Real money demand for long-duration UST appears to be selective. Granted, the 20Y is an odd tenor. However, given the back up in yields since the start of the year, it is eye catching that demand has not returned.
At these levels, we maintain that upside to 2Y yields look limited above 4.70%. Market pricing is practically in line with the Fed’s dotplot (6 cuts by end-2025) and it would take an even more aggressive take on no-landing to nudge yields towards 5%. Moreover, it would probably also require financial conditions / sentiment to stay benign (no repeat of banking system or CRE related stresses) to sustain yields close to 5%. We see levels for 2Y yields as keep to a receive on spikes stance for the shorter tenors.
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