US bond market resumes trading after tentative deal over debt ceiling

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US bond market resumes trading after tentative deal over debt ceiling

The bond market resumed trading after the Memorial Day holiday, following a tentative deal over the debt ceiling that eased worries of a US default.

The so-called ask yields on securities due June 6 on the day the US may run out of cash were indicated 13 basis points lower at around 5.16% in Asia on Tuesday, according to data compiled by Bloomberg. The expected equivalent yields on debt due 15 June were down 27 basis points. The bills typically trade in light volumes during the Asia session.

President Joe Biden and House Speaker Kevin McCarthy expressed confidence Monday that a resolution to suspend the debt ceiling would pass Congress in coming days. And acceptance gained early support from influential members of each party's moderate and pragmatist wings.

The Dow Jones index on some bills surged 7% last week, as investors steered clear of at-risk securities after Treasury Secretary Janet Yellen warned the government would run out of borrowing capacity by June 5.

Voting on the US debt ceiling is expected to begin from Wednesday and there appears to be sufficient support to clear passage, said Tapas Strickland, head of market economics at National Australia Bank Ltd. analysts expect Treasury to replenish its cash balance by the end of the third quarter, and could sell more than $1 trillion of bills by the end of the third quarter. The US cash stockpile is currently at $39 billion, a six-year low.

Investors are now looking to determine what comes next, which could limit declines in shorter-dated yields.

Long-dated Treasury yields also fell. The benchmark 10 year yield dropped four basis points to 3.76%, while the 30 year equivalent fell five basis points to 3.91%.

It's probably kind of a relief rally, said Hidehiro Joke, senior bond strategist at Mizuho Securities Co. in Tokyo. The market participants were taking a wait-and-see approach because debt ceiling negotiations had not been progressing well last week and this caused some upward pressures on Treasury rates last week. Bond traders are also mulling prospects for Federal Reserve interest-rate policy in June and July, with about one more hike expected in June and July. Friday's US job report will be closely watched to see if the labor market continues to show signs of cooling down.

This week, the US Treasury bond index will be reballed to incorporate major quarterly new issues of 10 - and 30 - year debt, which may drive demand for those sectors of the market.

The PCE data out on Friday shows the Fed is not completely out of the woods and may need to continue hiking, said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities in Singapore. The front-end maturity is more important than the back-end. None of the Jazz Struggles on streaming, but vinyl sales give the genre hope.