Three Big Events Shaking the Global Financial Market

US 3-Year Treasury Auction Sees Higher Bid-to-Cover Ratio Confirming Strong Buying Demand
Chairman Powell's Voice Gains Strength... Consumer Price Index as a Variable

[Asia Economy Reporter Park Byung-hee] The U.S. Treasury yields continue to shake the global financial markets day after day. The yield on the 10-year U.S. Treasury bond, which surged to 1.61% the previous day, fell to 1.53% on the 9th (local time). The Nasdaq, sensitive to U.S. Treasury yields, plunged 2.4% the previous day and then soared again by 3.69% on the same day.

The stabilization of Treasury yields on this day was due to strong buying demand from investors confirmed in the 3-year Treasury auction conducted by the U.S. Treasury, contrary to concerns.

◆ Successful 3-year Treasury auction signals "yields won't rise further" = At the beginning of the year, the 10-year Treasury yield was below 1%. However, as President Joe Biden's $1.9 trillion stimulus plan took shape and COVID-19 vaccinations accelerated, the 10-year bond yield surged to the 1.6% range within two months. Market participants interpreted that rising expectations for economic recovery and inflation concerns together led investors to start worrying about the Fed's tapering (reduction of quantitative easing).

The market viewed the three-day Treasury yield auctions starting on this day as a key turning point to gauge future yield levels. If there were strong predictions that Treasury yields would rise further, participation in the auction would be low.

When the auction results were revealed, the bid-to-cover ratio for the 3-year Treasury was high at 2.69 to 1, significantly exceeding last month's 2.39 to 1. The winning yield was also formed at a favorable level of 0.35%. Treasury prices and yields (returns) move in opposite directions.

The auction results were interpreted as investors seeking stable bond interest income at the current level. They believed inflation risks were not significant, and therefore, there was little room for Treasury yields to rise further.

Financial information provider Action Economics commented on its blog, "The favorable results of the 3-year Treasury auction brought relief to the market, and Treasury yields declined." It added, "Although there was concern last month about weakening Treasury demand due to poor results in the 7-year Treasury auction, at least today, such concerns have disappeared."

However, it is not yet a situation to be fully relieved. Some argue that since there are still many Treasury sell positions, it is necessary to observe the trend further. The U.S. Treasury has more important auctions ahead on the 10th and 11th. On the 10th, $38 billion of 10-year Treasury bonds will be auctioned, and on the 11th, $24 billion of 30-year Treasury bonds will be auctioned. Wall Street's attention is particularly focused on the results of the benchmark 10-year Treasury auction.

Jerome Powell, Fed Chair [Photo by Reuters]

◆ Powell gaining strength again = Following the Treasury auctions, the market is focusing on the Federal Reserve's Federal Open Market Committee (FOMC) meeting scheduled for the 16th and 17th. With the successful Treasury auctions, expectations are rising that Fed Chair Jerome Powell's repeated emphasis on "low inflation risk" will gain more credibility.

Chairman Powell has consistently sought to calm the market by stating "the accommodative stance will be maintained" whenever Treasury yields surged and financial market volatility increased. The auction results can be interpreted as investors placing trust in Powell's statements. Communication between the market and Powell is proceeding smoothly. When communication is smooth, the risk of a tightening shock can be reduced.

If the upward trend in yields is halted, the risk of credit tightening in financial markets also decreases, allowing the Fed to operate monetary policy more flexibly.

◆ U.S. consumer prices also in focus = Another variable ahead of the FOMC is the February Consumer Price Index (CPI) inflation rate to be released by the U.S. Department of Labor on the 10th. In a Bloomberg survey, Wall Street analysts expect the February CPI to rise 1.7% year-over-year, a significant increase from 1.4% in January. However, the core CPI inflation rate (excluding food and energy), which the Fed closely monitors, is expected to remain steady at 1.4%, the same as in January. If the core CPI inflation rate comes out as expected, it is unlikely that Fed Chair Powell will issue strong warnings about inflation risks.

This content was produced with the assistance of AI translation services.