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Treasuries fall in run-up to $16 billion bond sale

A man looking at his phone is reflected in a wall as an electronic board displays stock information at the Australian Securities Exchange in Sydney, Australia, on May 20, 2019.   (Brendon Thorne/Bloomberg)
By Rita Nazareth Bloomberg

The stock market extended its powerful November rally ahead of Nvidia Corp.’s results, with Wall Street breathing a sigh of relief after a $16 billion sale of 20-year Treasuries lured bond buyers.

Shortly after the auction results, benchmark 10-year yields reversed course and fell to around 4.4%.

The S&P 500 extended gains to close at the highest since August while the tech-heavy Nasdaq 100 hit a 22-month high.

Both Nvidia and Microsoft Corp. climbed to fresh peaks amid a revival of the artificial-intelligence bid. The dollar fell to an 11-week low.

“We remain positive on equities and expect a broadening of the rallies recently experienced as the US economy continues on a sustainable economic expansion albeit at a modest pace,” said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.

Traders have also been fixated on Treasury sales, especially after the U.S. recently offered an unusually large premium to sell 30-year securities.

Those auctions have also been exerting a growing sway over stocks, underscoring how the path of interest rates is gripping markets of late.

The 20-year bond auction drew yields of 4.78%, compared with the pre-sale level of 4.79%.

After a more than three-decade hiatus, the Treasury resurrected 20-year bonds in May 2020.

Before Monday’s auction, it had never sold the securities during the Thanksgiving week.

They’ve traded at a discount to other long-term maturities – which caused a degree of apprehension ahead of the sale.

“Treasuries offer extremely attractive yields,” according to Principal Asset Management.

“And while the potential for capital appreciation might be limited in the face of an impending economic slowdown, the assurance of a steady income from Treasuries makes them a solid option for investors prioritizing stability heading into an uncertain 2024.”

To Peter Boockvar, author of the Boock Report, the auction was actually fairly mixed, with traders focusing more on the lower yield relative to the pricing right before it – rather than the below average bid to cover.

Due to its somewhat “orphaned status” and small size, “I don’t know what to make of the auction in terms of messaging,” he noted.

As the earnings season winds down, investors will be on the lookout for results from a handful of retailers and tech companies.

Nvidia’s quarterly results Tuesday could exceed sky-high investor expectations thanks to strong demand for generative AI.

Best Buy Co., Nordstrom Inc. and Lowe’s Cos. are set to post slumping sales, reflecting the slowdown in discretionary spending.

The S&P 500 is set to rise toward its all-time high early next year, pullback midyear and then rally back toward the highs, according to strategists at Societe Generale SA.

“The S&P 500 should be in ‘buy-the-dip’ territory, as leading indicators for profits continue to improve,” wrote Manish Kabra.

“Yet, the journey to the end of the year should be far from smooth” he added, citing an economic downturn, a looming credit selloff, and ongoing quantitative tightening as hurdles traders still need to face.

To some market watchers, the S&P 500’s rally is looking increasingly unsustainable.

Strategists tracked by Bloomberg predicted on average in mid-October that the gauge would end the year at 4,370 – but it is already been trading above 4,500.

To power back to its previous peak, the S&P 500 needs more than just the earnings recovery that appears to be underway – rate cuts are necessary, too.

That’s according to Bloomberg Intelligence’s fair-value model of the U.S. stock benchmark, which says the consensus 2024 price target on the gauge looks too lofty.

The typical post-earnings recession rebound is expected to come against a backdrop of sustained higher interest rates.

That’s likely to limit potential upside for the S&P 500 to around levels the gauge is currently trading at, even in the best-case scenario, based on projections by BI equity strategists Gina Martin Adams and Michael Casper.

“The market as a whole has not yet eclipsed its early-2022 highs, reflecting the push and pull between optimism for a Fed-engineered soft landing and the potential underestimation of economic headwinds,” said Jason Pride and Michael Reynolds at Glenmede.

Meantime, some of Wall Street’s top strategists are divided when it comes to Corporate America’s earnings outlook next year.

While Citigroup Inc.’s Scott Chronert expects profits to hold up even if the economy slips into a recession, JPMorgan Chase & Co. strategist Mislav Matejka says diminishing pricing power would crimp overall revenue and margins regardless of whether growth contracts.

A Citigroup index shows downgrades to U.S. earnings estimates have outnumbered upgrades for nine weeks in a row – the longest streak since February.

Chronert does expect analysts’ estimates for 2024 to drop in the coming quarter – but that would only lower the bar for companies, he said.

And as the dollar rally stalled, it will take some firm real-sector data to challenge the current dovish Fed narrative, according to Win Thin, global head of currency strategy at Brown Brothers Harriman & Co.

“The U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the market thinks,” Thin noted. “That said, the dollar remains vulnerable until we see a shift in market sentiment and expectations.”

To Solita Marcelli at UBS Global Wealth Management, the dollar should remain stable in the first months of 2024 due to robust economic growth and high interest rates relative to the rest of the world.

Elsewhere, oil extended gains as traders boosted bets that the OPEC+ alliance will intervene in the market to bolster prices.