If you were hoping Tuesday’s 10-year auction would give the Treasury market some relief after a rough morning, it didn’t. The $42 billion 10-year note sale drew weak demand, and the 10-year yield is back above 5%.
A rough day for Treasuries
Treasuries were already trading on their lows, with the front end showing the most weakness.
The day started lower after Fed Governor Chris Waller spoke at a conference in London, suggesting that a 50-basis-point rate hike could be needed if inflation readings stay hot.
October’s CPI report followed, and it came in a touch hotter than expected. Then Boston Fed President Logan, who is an FOMC voter this year, said there could be a need for two 25-basis-point hikes before the Fed pauses.
Losses widened through the morning, and the 10-year yield moved back above 5.000%. The 50-day moving average at 5.041% sits just above it.
The auction gave the market little comfort:
High yield: 5.020%, about 1 basis point above the when-issued yield of 5.010%. That’s called a “tail,” and it means buyers demanded a bit more yield than the market expected.
Bid-to-cover: 2.46, below the 12-auction average of 2.53.
Indirect bidders: 61.2% of the sale, well below the 71.4% average. Indirect bidders include foreign central banks and large investment funds, so this is a closely watched number.
Direct bidders: 29.0%, up from a 19.7% average.
Yield vs. recent auctions: The 5.020% high yield is about 60 basis points above the 4.425% average of the last 12 auctions.
When indirect demand falls and direct demand rises, it can mean some of the usual large buyers stepped back while others stepped in. That left a bigger share of the sale to be absorbed by dealers, which is part of why the market didn’t get a bounce afterward.
Bottom line
Between hot inflation, hawkish Fed comments and a weak 10-year auction, Tuesday has been a tough day for Treasuries. Just a reminder, the bond market is closed for trading tomorrow, Veteran's Day holiday. The equity markets will be operating on a regular schedule.
The 10-year is back above 5.000%, and the market is watching to see whether it can hold or whether it pushes through the 5.041% moving average.