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Treasury yields remained well below their highs for Wednesday afternoon, after the US sold $ 38 billion in 10-year banknotes, with few market disruptions.
The demand for the 10-year banknote was in line with recent auctions, with $ 2.38 of bids for every Treasury dollar sold. This contrasts with the sale of 7-year bonds on February 25, which attracted a record amount of bids. The bonds were sold at yields above pre-auction levels, according to Bloomberg, but were much smaller than the 7-year sale.
The auction mattered for several reasons. First, Treasuries have been selling in recent weeks, increasing the 10-year yield by about 40 basis points, or one hundredth of a percentage point, starting Feb. 10.
iShares Treasury bond for over 20 years
the exchange traded fund (ticker: TLT) lost more than 6% at that time.
The second is the potential of the future hiccup of the Treasury market to destabilize other markets. US stocks and bonds sold abruptly in late February following a weak 7-year banknote auction. The 10-year yield rose briefly by more than 1.6% after the auction and, according to market watchers, there were signs of leverage among investors who put markets in the early days of the March 2020 pandemic. A 20-year-old auction last month was also met with lower demand than usual.
However, the worst pressure seems to be outside the Treasury market at the moment. Part of the reason for this is, ironically, the popularity of bearish bets over the 10-year bill. There was unusually strong demand for 10-year banknotes in short-term markets, where investors borrow and borrow securities, a sign of strong short interest rates.
Another factor that probably helped the auction was the latest inflation data released on Wednesday. With the exception of volatile food and energy prices, US consumer prices rose more slowly in February than economists expected, according to the latest report from the Department of Labor’s consumer price index. Inflation erodes the value of long-term bonds, so that lower-than-expected reading could have increased demand.
With a broader vision, some investors have expressed concern that the Treasury is selling more long-term debt as the economy recovers and market-based inflation forecasts return. In their view, this could increase US yields and lead to tighter financial conditions. Another weak tender could fuel these concerns. Technological actions, in particular, could be affected by further increases in yields, as their future returns are more speculative and long-term.
But a closer look at recent investor data in the auction, released on Monday, may help decipher what happened in the 7-year sale last week.
There has been a particularly sharp drop in demand from foreign investors: they have bought only 8% of the auction, a record high, and well below the long-term average of 19% since 2009. This is remarkable because external demand could eventually back up, if investors in Europe and Japan are looking for stronger relative returns in the US (although currency fluctuations and hedging costs will also play a role in demand).
US investment funds are also bidding less. While the decline in their demand has been smaller, they also represent a larger proportion of the buyer base. They bought 49% of the 7-year sale in February; this was higher than their long-term average of 44%, but decreased compared to the last five years, when they bought an average of 57% of each sale over 7 years.
Data on the general tender and broad categories of bidders will be published shortly after the sale at 13:00, but the breakdown of buyers by category will not be published until March 22.
Since 2009, foreign investors have bought about 20% of 10-year bond sales, while mutual funds have bought about 40%. In the last five years, foreign investors have fallen 18% in sales, while investment funds have acquired 50%.
The next litmus test on the market will be a 30-year bond sale at 13:00 East on Thursday. Investors will also watch this sale, looking for signs of investor demand from all corners.
Write to Alexandra Scaggs at [email protected]