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Treasury yields remained well below their highs on Wednesday afternoon, after the U.S. sold $ 38 billion in ten-year banknotes with little market disruption.
Demand for the ten-year note was in line with recent auctions, with bids of $ 2.38 for every dollar of Treasury sold. This marks a contrast to the Feb. 25 sale of 7-year bonds that attracted a record amount of bids. The bonds were sold at yields above the levels indicated in the pre-auction negotiation, according to Bloomberg, but it was a much smaller gap than the 7-year sale.
The auction was important for a number of reasons. First, treasuries have been sold in recent weeks, raising yields to ten years by about 40 basis points, or hundredths of a percentage point, since Feb. 10.
IShares Treasury Bills over 20 years old
the exchange traded fund (ticker: TLT) has lost more than 6% in that time.
The second is the potential for future Treasury market hiccups to destabilize other markets. US stocks and bonds sold sharply in late February following the weak seven-year banknote auction. Ten-year yields rose briefly above 1.6% after the auction and, according to some market watchers, there were signs of problems among leveraged investors of the kind that ravaged markets in the early days of the pandemic in March 2020. A 20-year auction last month also met lower-than-usual demand.
However, the worst of the pressure seems to be outside the Treasury market for now. Part of the reason for this is, ironically, the popularity of bearish bets against the ten-year note. There has been an unusually strong demand for ten-year notes in short-term markets where investors apply for loans and securities loans, a sign of strong short-term interest.
Another factor that probably helped the auction was the latest inflation data released on Wednesday. Excluding volatile food and energy prices, U.S. 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 a weaker-than-expected reading may have boosted demand.
With 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. In his view, this could increase U.S. yields and lead to tighter financial conditions. Another bad auction could fuel these concerns. In particular, technology stocks could be affected by further increases in returns, as their future returns are more speculative and long-term.
But a closer look at recent investor data from auctions, released Monday, may help decipher what happened at the 7-year sale last week.
There was a particularly sharp decline 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 demand foreign exchange may end up recovering, if investors in Europe and Japan look for stronger relative returns in the US (although currency fluctuations and hedging costs will also play a role in demand).
U.S.-based investment funds also offer less. While the decline in demand was smaller, they also represent a larger proportion of the buyer base. They bought 49% of the February 7-year sale; which was above the 44% long-term average, but was one step lower than the last five years, when they bought an average of 57% of each sale at 7 years.
Data on global auction demand and broad categories of bidders will be released shortly after today’s sale at 1pm, but the distribution of buyers by category will not be published until March 22nd.
Since 2009, foreign investors have bought about 20% of ten-year bond sales, while mutual funds have bought about 40%. In the last five years, foreign investors have reduced sales by 18%, while mutual funds have bought 50%.
The next litmus test of the market will be the sale of 30-year bonds at 1pm on Thursday. Investors will also observe this sale and look for signs of demand from investors from all corners.
Write to Alexandra Scaggs at [email protected]