Bond Tsunami Q3

Goldman keeps pointing out that the first half of July is seasonally the most bullish time of the year, and that same seasonal data says the the second half of June is one of the weakest. But last two weeks of June 2024 closed up, so I don't give "seasonality" much attention. And there is at least one big macro factor on deck for this quarter:

Q3 is expected to see the highest supply of coupons (longer-dated Treasuries) on record. This means the size of Treasury auctions will peak in Q3 (July, August, and September), so there is more opportunity for "mistake" (tailing auctions). Coupon supply puts upward pressure on yields.

There are basically three things that can ease the impact it has on yields. Like we said in November, Fed rate cuts could manufacture demand for Treasuries. Alternatively, so could a mild recession. At the third quarter QRA in late July, Yellen could unleash another surprise where she reduces coupon issuance (reduces supply).

I don't think any of these options are likely. The Fed tapering it's QT (fewer Treasuries running off) did stop the bond selloff somewhat, but it's hard to see any way the coupon supply does not drive yields higher.

Not only that but, as expected, yields responded pretty aggressively to the increased odds of a Trump Administration. Bond market is pricing in the inflation (tariffs, easy policy, large deficits).