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Treasury yields remained well below their highs for Wednesday afternoon, after the US sold $ 38 billion in 10-year notes with little disruption to the market.
Demand for the 10-year note was in line with recent auctions, with $ 2.38 in bids for every dollar sold in Treasury bills. This stands in contrast to the sale of 7-year bonds on February 25, which attracted a record number of offers. The bonds were sold at yields above the levels indicated in pre-auction trading, according to Bloomberg, but it was a much smaller gap than the 7-year sale.
The auction was important for a few reasons. The first is that Treasury bills have been selling in recent weeks, raising 10-year yields by about 40 basis points, or hundredths of a percentage point, since February 10.
IShares Treasury Bond 20 years or more
exchange-traded fund (ticker: TLT) lost more than 6% in that period.
Second, there is the potential for future hiccups in the Treasury market to destabilize other markets. US technology stocks and bonds sold strongly at the end of February, following the weak 7-year banknote auction. The 10-year yield rose briefly above 1.6% after the auction and, according to some market observers, there were signs of problems among leveraged investors of the kind that rocked the markets in the early days of the pandemic in March 2020. A 20-year auction last month was also attended to with less than normal demand.
The worst of the pressure seems to be out of the Treasury market for now, however. Part of the reason for this is, ironically, the popularity of bearish bets against the 10-year banknote. There has been an exceptionally strong demand for 10-year notes in the short-term markets, where investors borrow and lend bonds, a sign of strong short interest.
Another factor that probably helped the auction was the most recent inflation data published on Wednesday. Excluding volatile food and energy prices, US consumer prices rose more slowly in February than economists expected, according to the Labor Department’s latest consumer price index report. Inflation erodes the value of long-term bonds, so a weaker-than-expected reading may have driven demand.
In a broader view, some investors have expressed concern that the Treasury will sell more long-term debt as the economy recovers and market-based inflation forecasts recover. This could raise US yields and lead to stricter financial conditions, in their opinion. Another bad auction can fuel those concerns. Technology stocks, in particular, may be affected by further increases in earnings, as their future returns are more speculative and long-term.
But a closer look at recent auction investor data, released on Monday, may help to decipher what happened in the 7-year sale last week.
There was a particularly sharp drop in demand from foreign investors: they bought only 8% of the auction, a record low, and well below the long-term average of 19% since 2009. This is notable because foreign demand may eventually recover upwards, if investors in Europe and Japan seek stronger relative yields in the US (although currency fluctuations and hedge costs also play a role in demand).
Investment funds based in the United States also offered less. Although the decline in their demand has been less, they also represent a larger proportion of the buyer base. They bought 49% of February’s 7-year sales; this was higher than the long-term average of 44%, but it was a step down from the last five years, when they bought an average of 57% of each 7-year sale.
Data on general auction demand and broad categories of bidders will be released shortly after the sale at 1 pm today, but details of buyers by category will not be released until March 22.
Since 2009, foreign investors have bought about 20% of sales of 10-year bonds, while investment funds have bought about 40%. In the past five years, foreign investors have reduced 18% of sales, while investment funds have bought 50%.
The next litmus test of the market will be the sale of 30-year-old bonds at 1 pm in the east of Thursday. Investors will also be watching this sale, looking for signs of demand from investors from all corners.
Write to Alexandra Scaggs at [email protected]