WASHINGTON: Long-dated Treasury yields rose after an auction of 10-year notes drew weak demand and traders shifted their focus to the sale of 30-year bonds yesterday.
The benchmark 10-year yield was up about two basis points (bps) to 4.23% Wednesday afternoon, while shorter-dated tenors edged lower.
The move followed soft demand for the US$42bil sale, the second of three auctions this week.
“The auction results were a little soft, but that’s not really too surprising considering the extent of the decline in rates since mid-July and especially since last Friday,” said John Canavan, an analyst at Oxford Economics.
A rally in the Treasuries market over recent weeks accelerated last Friday after a jobs report showed weakness in the US labour market, prompting traders to add to wagers that the Federal Reserve (Fed) is poised to cut interest rates as soon as next month.
The 10-year yield is about 26 bps lower than it was in mid-July.
The 10-year note auction result was 4.255%, about 1.1 bps higher than indicated by its yield in pre-auction trading just before the bidding deadline, a sign that demand fell short of expectations.
The so-called tail was the biggest since the year-earlier 10-year note auction missed by more than three bps.
The United States will offer US$25bil of 30-year bonds soon.
“The rise in yields isn’t significant despite a rare tail on Wednesday’s auction, reinforcing forecasts of stepped up easing from the Fed,” said Bloomberg strategist Alyce Andres.
Yields had hit session highs about 90 minutes before the auction in an unexplained surge that faded quickly.
The midday yield surge “may have spooked a few people going into the auction,” said George Catrambone, head of fixed income at DWS Americas.
“An investor going into that auction that thought there was a lot of potential short interest, would want to be careful about their bid. It would explain some of the tepid demand.”
At the same time, the tail meant that the new issue will have a coupon rate of 4.25% instead of the 4.125% it would have obtained if the auction yield had been lower than 4.25%, a feature that enhances its appeal investors.
Rate-cut wagers – and short-maturity Treasuries – got some extra backing Wednesday from comments by Fed officials.
Minneapolis Fed president Neel Kashkari had earlier said a slowing of the US economy may make a rate cut appropriate in the near term, and he still sees two cuts by year’s end.
Fed governor Lisa Cook said the revisions in July employment data could signal an inflection point for the US economy.
Swap contracts linked to Fed rate decisions are pricing in nearly 60 bps of easing by year-end and about 85% of a move in September.
While 10-year notes have traded at lower yield levels this year – approaching 3.85% in early April – auctions take place once a month on a fixed schedule that’s independent from prevailing levels in the intervening weeks.
This week’s auctions concluded yesterday with a US$25bil 30-year new issue that appears likely to draw the lowest yield since March. — Bloomberg
