Prices dip after EU trade deal, ahead of auctions

NEW YORK – US Treasuries slipped on Monday, pushing yields higher, as risk sentiment suggested more optimism about the global economic outlook after the United States and the European Union struck a trade agreement on Sunday that was received with mostly relief by investors.

It’s an event- and data-packed week starting with the Treasury’s refunding announcement on Wednesday. The US Treasury is widely expected to maintain current auction sizes for notes and bonds when it announces financing plans, and will likely keep them steady for some time.

Bond market participants are also bracing for Monday’s auctions of USD 69 billion in US two-year notes and USD 70 billion in five-year Treasuries. That has spurred some concession in the market, meaning investors are selling Treasuries ahead of the auction so they can buy them back later at a lower price.

The Treasury will also auction USD 82 billion in 13-week bills, and USD 73 billion in 26-week debt later on Monday. It has focused on issuing Treasury bills to rebuild its cash balance that has been depleted with a debt ceiling issue that was unresolved prior to President Donald Trump’s tax and spending legislation being signed into law on July 4.

But it has been the EU trade deal that has set the bond market on this risk-on path.

The agreement, announced on Sunday between two economies that account for almost a third of global trade, will see the US impose a 15% import tariff on most EU goods – half the threatened rate but much more than what Europeans hoped for.

The EU also pledged to make USD 750 billion in strategic purchases, covering oil, gas, nuclear, fuel and chips during Trump’s term, including up to USD 600 billion in US military equipment.

“The trade deal over the weekend was the first that investors can trade on. I don’t think anybody was really expecting that,” said Jim Barnes, director of fixed income, at Bryn Mawr Trust in Berwyn, Pennsylvania.

“The market has taken that on the positive side, with the equity market starting higher, bond yields trending up,” Barnes said adding that the deal has reduced some uncertainty in the market, spurring more growth.

In late morning trading, the benchmark 10-year yield was up 2.4 basis points (bps) at 4.409%, after posting last Friday its largest weekly decline in a month. US 30-year yields rose 2 bps to 4.947%. On Friday, 30-year yields posted their biggest weekly fall in two months.

The two-year yield, which reflects interest rate expectations, edged up 1.3 bps to 3.929%.

The Federal Reserve also meets this week in a two-day meeting. It is broadly expected to keep its benchmark overnight interest rate in the 4.25%-4.50% range when its two-day meeting ends on Wednesday.

Ahead of the auction, US five-year yields were up 1.4 bps at 3.966%.

Analysts expect Monday’s sale of two-year and five-year notes to be well-received.

“All else being equal, we’d expect this reality to cheapen the front-end of the curve as an auction concession,” wrote BMO Capital Markets in a research note, referring to expectations that yields will fall after the auction.

The Treasury will also announce later on Monday borrowing estimates for the quarter. In the Treasury’s preliminary estimate in May, the department announced that it would borrow USD 554 billion for the third quarter. Analysts expect that figure to sharply increase.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski)