Investors wanted the newest 10-year Treasury notes badly enough that they were willing to settle for a yield of less than 4%.
(Bloomberg) — Investors wanted the newest 10-year Treasury notes badly enough that they were willing to settle for a yield of less than 4%.
The $38 billion auction was awarded at 3.999%, becoming the third straight 10-year new issue to pay a fixed rate of less than 4%. Since the auction details were announced on Aug. 2, its bigger-than-anticipated size pushed the yield on the new 10-year in pre-sale trading up toward 4.19% on Friday. Ultimately, investors decided they could live on less.
It’s a reminder — ahead of Thursday’s 30-year bond auction, the last sale of the week — that Treasury supply trends frequently don’t move the market in expected ways. Rather, investor preferences based on economic outlook and expectations for alternative asset classes can overwhelm the impact of supply on price. An auction of three-year notes Tuesday produced even stronger demand metrics.
“The supply is being absorbed for now,” Michael de Pass, global head of rates trading at Citadel Securities said on Bloomberg TV. “The market seems well equipped to handle it, but we have to be cognizant of the fact that it may change.”
Waning Inflation
For now, demand for bonds is drawing support mainly from ebbing inflation, de Pass said. At the same time, “the labor market remains structurally tight, housing seems to have bottomed, fiscal policy remains quite expansionary.” All of which supports the Federal Reserve keeping rates higher for longer, while bond yields anticipate steep interest-rate cuts beginning next year.
Thursday’s auction of $23 billion in 30-year bonds is an even riskier affair, and it faces the additional challenge of following the release of consumer inflation data for July, at 8:30 a.m. in Washington. The latest consumer price index readings may alter expectations for another Fed rate increase this year, which traders continue to view as only slightly less likely than no change.
The 10-year note “auction was actually pretty decent,” Ira Jersey, chief US rate strategist at Bloomberg Intelligence, told Bloomberg TV. The 30-year “could be much different from today,” amounting to “a test of how much duration or market risk investors want to take.”
–With assistance from Ye Xie.
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