The global mother of all bonds – the US 10-Year – was in blowout demand today.
There is much confusion out there in GCR Land about US Treasuries. With reports stating there’s no foreign demand and misleading narratives about the meaning of bond prices vs. bond yields, it’s easy to get misinformed.
No worries. After reading this article you will know everything you need to know about bonds in order to accurately discern fact from hype.
What Happened in Today’s Bond Auction
Today’s 10-year Treasury bond auction shattered records, both in terms of the amount sold and the robustness of demand. Here’s what made today’s $42 billion auction, aimed at funding government operations through debt maturing on February 15, 2034, not just historic but downright stellar.
Record Auction Size and Demand
Today’s auction was monumental, offering $42 billion in 10-year bonds—the largest amount ever for this maturity.
After a lukewarm reception to a smaller 3-Year Treasury auction yesterday, there were concerns. Would there be enough appetite for such a significant 10-Year offering?
The answer was a resounding YES.
Why Today’s Auction Was Stellar
- High Yield: The bonds sold today offered a yield of 4.093%, slightly higher than last month’s 4.024%. This yield is attractive to investors looking for safety, security, and pristine collateral.
- Strong Demand: The auction’s “bid to cover” ratio, a key indicator of demand, stood at 2.56. This means there were bids for 2.56 times the amount of bonds available, signaling strong investor interest.
- Foreign Demand: A standout aspect was the ultra-strong demand from foreign investors, known as “indirect” bidders. Foreign demand consumed a whopping 70.1% of the auction, showcasing global appetite for safe harbor and to secure collateral. US Treasuries are considered the most pristine form of collateral on earth.
Understanding the Basics of Treasury 10-Year Auctions
Understanding the basics of Treasury 10-year auctions and their impact on bond yields versus bond prices requires a grasp of a few key concepts. Let’s break it down into simpler terms.
The U.S. Department of the Treasury issues bonds to borrow money to fund government spending. A 10-year Treasury bond is a loan to the government that pays back the initial investment plus interest over ten years.
All US Treasuries are sold via regularly scheduled auctions.
The Bond Auction Process
The Treasury sells these bonds through auctions. Investors bid on the bonds, and the yield (interest rate) is determined through this competitive process.
The auction can be of two types: competitive bids, where investors specify the yield they’re willing to accept, and non-competitive bids, where investors accept whatever yield is determined at the auction.
How Bond Yields and Prices Are Related
Bond Yield: This is the return an investor gets on a bond. The yield is inversely related to the bond’s price. When bond prices go up, yields go down, and vice versa.
Bond Price: This is determined by demand and supply in the market. Factors like changes in interest rates, economic outlook, and investor sentiment can affect bond prices.
Impact of the Auction Process on Bond Yields and Prices
Demand at Auction: High demand for bonds at an auction will generally lead to lower yields. This is because investors are willing to pay more for the bonds, which increases the price of the bond and, in turn, lowers the yield.
Supply of Bonds: If the Treasury is selling a large amount of bonds, the increased supply can lead to lower bond prices if demand doesn’t keep pace, which would increase yields.
Market Expectations: Investors’ expectations about future interest rates, economic health and inflation can affect bidding behavior. If investors expect a higher risk environment, they will demand higher yields (during the auction) to compensate for the anticipated risk.
A Practical Example
If a 10-year Treasury bond auction sees higher than expected demand, the price of the bonds will rise because investors are willing to pay more to secure the bonds.
As a result, the yield on those bonds will fall since the fixed interest payments become a smaller percentage of the bond’s higher price.
Conversely, if an auction has weak demand, the Treasury may have to sell the bonds at lower prices to entice buyers, resulting in higher yields.
The auction process for 10-year Treasury bonds is crucial in setting the yields for new bonds entering the market. This process, influenced by investor demand and broader economic factors, directly affects bond prices and yields.
In summary, today’s record-breaking 10-year Treasury auction was a testament to the strength and appeal of U.S. government bonds.
With unprecedented demand, particularly from international markets, this auction underscores the global financial community’s flight to safety and demand for pristine collateral.
Supporting article: Record Large 10Y Auction Sees Stellar Demand, First Stop-Through In 12 Months
