New thoughts

 

The Treasury Department handed investors a happy surprise last week. Now the question is how far they can run with it.

Stocks and bonds both staged rallies last week, getting a boost when the Treasury increased the size of longer-term debt auctions by a smaller amount than many had expected.

By the end of the week, the yield on the benchmark 10-year U.S. Treasury note—the source of so much recent anxiety in markets—had fallen all the way back down to 4.557% after briefly topping 5% on Oct. 23. The S&P 500 climbed 5.9% for the week, largely reflecting relief over the decline in yields, which are a critical driver of U.S. borrowing costs.

Yields, which fall when bond prices rise, were also pulled lower by soft economic data and hints from the Federal Reserve that it likely won’t raise interest rates again this year. But it was the Treasury move that many saw as the crucial catalyst.

Heading into last week, there had been debate about what had caused yields to surge in recent months. Some analysts pointed mostly to the strong economy and expectations for a higher path of short-term interest rates set by the Fed.Others emphasized what they saw as an imbalance in the supply and demand for Treasurys, worsened by a recent increase in the size of longer-term debt auctions needed to fund a widening federal budget deficit.

Whatever the answer, investors seized on a normally overlooked event—Treasury’s quarterly announcement of its coming borrowing plans—as an important moment for markets. 

As it turned out, Treasury on Wednesday not only announced smaller-than-expected increases to longer-term debt auctions but also suggested that it was willing to overstep informal guideposts for how much in short-term Treasury bills to issue.

Just based on dollar amounts, the difference between what Wall Street had anticipated and what Treasury delivered was small. But investors embraced what they saw as the underlying message.