The U.S. Treasury saw a notable slump in demand for its latest benchmark bond auction Wednesday, which comes just before the Federal Reserve publishes details of its September interest-rate decision and a day ahead of a key inflation reading from the Commerce Department.
Investors placed bids worth $87.5 billion for the $35 billion in paper on offer, which was re-opening of an existing 10-year note, a level that represents a so-called bid-to-cover ratio, a key demand indicator, of 2.5.
That's down modestly from the 2.52 bid-to-cover ratio recorded at the early September auction, when the yield was pegged at 4.289%,
Today's rate of 4.61% should have made the sale more attractive to investors, given that the entry price would be lower, but primary dealers in the Fed's auction system ended up buying around 18.7% of the issue, the highest total since December of last year.
Foreign investors were also reluctant, according to auction data, taking down just 60.3%, down from 66.3% at the prior sale in early September.
The benchmark sale is part of the Treasury's expanded funding remit that will see it auction around $103 billion in new paper each quarter, comes amid historic volatility in the bond market and increasing concern over the fiscal stance of the U.S. government.
Earlier this year the government lost another triple-A credit rating and was called out by the International Monetary Fund in its annual World Economic Outlook.
Demand for the note was expected to be solid, even with the broader market uncertainty about the Fed's "higher for longer" rate stance, reflected in the fact that investors now are extending bets that the central bank's policy-tightening cycle ended with its last quarter-point increase in July.
Benchmark 10-year notes were last seen trading at 4.612% following the auction results, down from last week's 2007 high of 4.895%, with 2-year paper pegged at 5.003%.
CPI and Fed's September meeting minutes awaited
Minutes of the Fed's September meeting, where it held rates steady at 5.25% to 5.5%, will likely shed light on the central bank's near-term policy stance.
Recent signals from Fed officials suggest that the recent surge in Treasury yields, which lifted 10-year notes to a 2007 high of 4.895% last week, are restricting the broader economy and have likely negated the need for another rate hike.
The Commerce Department will also publish its estimate of September inflation before the market opens on Thursday, with analysts looking for a core consumer price index, the Fed's favored focus, having slowed to 4.1% from 4.3% in August. That level, however, would remain more than double the central bank's preferred 2% target.
"We believe the current high level of the 10-year Treasury yield is unsustainable given that the Federal Reserve is close to or finished with their rate hike campaign and the recent bond yield surge has actually accomplished most of the work for the Fed," said James Demmert, chief investment officer at New York-based Main Street Research.
"The 10-year Treasury yield is likely to decline in coming weeks and months, which is a very bullish setup for global stocks."
Action Alerts PLUS offers expert portfolio guidance to help you make informed investing decisions. Sign up now.
