More than just employment data! The auction of US Treasury bonds has become the top concern for stock market investors.

Smart Finance APP noticed that the auction of US Treasury bonds is having an increasingly significant impact on the stock market, highlighting the influence of recent interest rate trends on the market. According to data from Citigroup, since the beginning of 2022, the S&P 500 index has fluctuated by about 1% on auction days, exceeding the average level of the past 10 years.

Among the 22 bond auctions analyzed, all were 30-year bonds, and the subsequent volatility in the stock market was greater than the volatility in monthly employment data, which is usually an important basis for traders to assess economic health and Federal Reserve policy. This research led by Stuart Kaiser, Head of US Stock Trading Strategy at Citigroup, shows similar results for 10-year Treasury bond auctions.

Their analysis has made stock traders highly vigilant about the $24 billion 30-year Treasury bond auction on Thursday, making this week a busy week for US government borrowing. The demand for 10-year Treasury bonds auctioned on Wednesday was slightly lower than expected.

Bond auctions have become a key focus for stock traders.

The importance of the US borrowing plan was evident last week when the US Treasury announced a smaller-than-expected increase in bond issuance, which boosted the S&P 500 index. This data, like Federal Reserve Chairman Powell's speech, became the focus of the day, and traders interpreted it as a signal that the Fed may end rate hikes.

Due to concerns that an increase in supply will keep yields near 10-year highs, which would have a negative impact on the stock market, this auction has been a focal point for various asset investors.

David Neuhauser, Founder and Chief Investment Officer of hedge fund Livermore Partners, said, "Many long-term assets in the stock market have performed very well recently because the market believes that the Fed's actions are over and they will wait and see before starting rate cuts."

He said that if the auction results are not good, "in the process of the government trying to raise funds, if the yield on longer-term bonds is much higher, then this argument may really be questioned in the future."

With the continuous increase in the federal deficit, the size of tradable US debt has surged from about $17 trillion at the beginning of 2020 to about $26 trillion.

Traditional buyers exiting

Althea Spinozzi, Fixed Income Strategist at Saxo Bank, said that although the auction size has increased significantly, some traditional buyers did not participate. As a result, some auctions have seen declines, which means they need higher yields to attract buyers.

She said, "In the past few weeks, we have seen that as soon as an auction ends, the market follows suit and sells US Treasury bonds." In this case, depending on how much the yield rises, "the impact on the stock market may be greater."This does not mean that the high yield after the soft bid is a sure thing. The 10-year Treasury bond auction on Wednesday saw a late decline in yields, partly due to traders' concerns about falling oil prices.

Investors are also paying attention to the auction and its impact on yields, as they may influence the Federal Reserve's decision-making path. This is because higher long-term interest rates can tighten the financial environment, potentially reducing the need for further rate hikes.

This week, Federal Reserve Board member Christopher Waller called the recent rise in yields a "earthquake" for the bond market, noting that the 10-year Treasury yield has risen 100 basis points since July and has attracted "a lot of attention". Federal Reserve Board member Michelle Bowman said it is still too early for officials to fully understand the implications of the widespread rise in yields.

Pooja Kumra, an interest rate strategist at TD Bank in Toronto, said that as long as the Federal Reserve maintains a long-term high interest rate stance, attention to the auction may continue.

She said, "But if we see a series of weak growth data, the market focus will return to the Fed's rate cuts, which is beneficial for US Treasury bonds." "In theory, yields will affect the financing rates of the private sector."