Treasury prices fell on Monday upon news that Apple was issuing $6.5 billion of debt. Yields on 10-year bonds rose by 2 basis points. Reporters first suggested that the large size of the offering – combined with Apple’s exceptionally low default risk – was enough of a substitute to draw demand away from Treasuries.
The Treasury market certainly has gotten shallower over the past year. One J.P. Morgan report suggests that it only takes a $80 million trade to move the Treasury market, compared to $280 million a year ago. It absolutely does seem reasonable that an corporate offering of that size could trigger a pullback.
However, yields at this point seem unsustainably low, as the prospect of rising interest rates looms in the near term. It might be best to look at Apple’s offering as a company taking advantage of debt market’s fairly weird state. Their offering signals that companies really are betting on a rate-increase later this year and that we were – and still are – due a pullback in Treasuries.
Bloomberg Trading Bonds is Hard and Treasury Market Rallies
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We will discuss the “term structure of interest rates” at some point: how do bond prices relate to expectations of growth and inflation. Very low medium-term rates imply very low future inflation and very low real interest rates. So it’s not clear that with 2-year bonds yielding 0.52% today (Thur 5 Feb) “markets” actually anticipate an interest rate increase.
It’s incredible that so many bonds are traded that you can execute a $10 million order in one trade and not move the market against you. I don’t know the structure of NYSE trades today, but not so long ago an order that size was where the specialists on the floor made their living (or not). So why they might accept a big sell order, they would need to be break it into smaller lots to match against the buy/sell “book” of their outstanding orders at any given time, which might not add up to the full amount. They thus always ran the risk that they had misjudged their book, or that the market would move before they could execute multiple small trades.
To what extent do you think the (il)liquidity of market for treasuries – and indeed most debt securities – is a function of the lack of any real centralized exchange? If traders could exchange debt securities through a centralized exchange, would this improve the depth of markets? It seems logical that it would lead to lower spreads, but I am not sure if increased depth would accompany it? Of course, with smaller spreads, it could be even easier to move the market.
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