The Treasury Market is Mixed as Another Flurry of Bond Sales Occurs

Wall Street prepared for a busy bond sales session as issuers aimed to borrow ahead of key economic data later in the week. Treasury rates were mixed in anticipation of a $42 billion auction of seven-year notes and a substantial amount of new corporate debt. Eight companies were considering selling US investment-grade bonds on Tuesday, following a record-setting February for bond issuance. The increase in rates comes as Treasury investors grapple with shifting expectations regarding how much the Federal Reserve will lower interest rates this year and an influx of new corporate issuance providing alternatives for yield-seeking investors.

‍

Analysts recommend acting promptly to lock in attractive bond yields, particularly favoring the five-year duration segment of quality bonds due to its combination of high yields, stability, and sensitivity to falling interest rate expectations. Shorter-term Treasuries outperformed longer ones, with 10-year yields remaining little changed at 4.29%. The S&P 500 hovered around 5,070, while Nvidia Corp. interrupted a three-day rally. Macy's Inc. experienced a rally following plans to close nearly a third of its US locations.

‍

Investors refrained from making significant bets ahead of Thursday's inflation data and a series of Federal Reserve speakers. Officials have emphasized that they are not in a rush to lower borrowing costs and will only do so once they are confident that inflation is retreating on a sustained basis. The upcoming personal consumption expenditures price index is expected to validate this stance and potentially diminish market expectations for a rate cut in the coming months.

‍

Analysts suggest that the Federal Reserve's messaging signals a delay in rate cuts even further into 2024, raising questions about whether investors will be content with pricing out cuts into Q3 or Q4, or if the market is anticipating nonzero odds of a rate hike. The equity market appears due for a pause and consolidation of recent gains, with the PCE inflation data on Thursday seen as the next short-term catalyst. The market has displayed resilience, shaking off negative news, and focusing on positive aspects. AI's potential to boost spending and productivity remains a strong narrative that captures market attention.

‍

Barclays Plc has raised its year-end target on the S&P 500 to 5,300 from 4,800, joining other banks in optimistic forecasts for the US equity benchmark. The Magnificent Seven tech megacaps have seen their average earnings per share rise 55% in the fourth quarter compared to a year ago, contributing to the Nasdaq 100's record high. S&P 500 companies are on track for their highest quarterly earnings beat rate since Q4 2021.

‍

While there is a perception of lofty valuations in the US stock market, it is noted that the S&P 500's above-average price-to-earnings ratio is largely driven by a few stocks known as the "Magnificent Seven." Despite elevated valuations, these stocks are expected to achieve earnings growth nearly five times that of the remaining stocks in the S&P 500 over the next years, leading to what is described as "rational exuberance."

‍

Despite a significant run in equities, the market is showing signs of froth, cautioning investors against complacency. While continued market advancement is possible, there is a call for investors to remain nimble and have a plan in place to navigate potential surprises that could create increased volatility in the coming months.

‍