U.S. Treasury auctions to provide demand ‘gut check’ as yields fall


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CHICAGO — Spiking prices for U.S. Treasuries that have sent yields to five-month lows could test demand for $62 billion of longer-term government debt due to be auctioned next week, analysts said on Thursday.

After a two-week drought in coupon supply, $38 billion of 10-year notes will be offered on Monday, followed by $24 billion of 30-year bonds on Tuesday.

The auctions come as yields, which move inversely to prices, have tumbled to levels last seen in February, with the benchmark 10-year yield falling as low as 1.25% on Thursday and the 30-year yield hitting a session bottom of 1.856%.

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Zachary Griffiths, macro strategist at Wells Fargo, said current yields, which are at “much-less attractive levels” than during June auctions, could pose a headwind for demand after an “almost insatiable” duration bid by investors for longer-term debt over the last couple of weeks.

“I don’t think we’re ready to say that next week’s auctions are going to go terribly just because of the move in the absolute yield levels, but it could be a little bit of gut check for where demand stands at these much-lower yields,” he said.

June auctions resulted in high yields of 1.497% for 10-year notes and 2.172% for 30-year bonds.

Investors will show up for the new offerings, but may seek a bit more yield, leading to larger-than-usual tails, which is the difference between the auction yield and the prevailing “when issued” market yield for the debt, according to John Canavan, lead analyst at Oxford Economics.

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“There clearly is interest at these levels, but we may require a little bit more of a concession just based on the view that an overbought long end will require slightly higher yields to be taken down,” he said.

Canavan added that foreign demand may decline a little, pointing to some pushback by Asian investors after rallies during U.S. trading sessions.

Tuesday’s release of U.S. consumer price index data ahead of the 30-year bond auction could be a factor for that offering. Canavan said a significant upside surprise might require a little bit more of a concession, while a downside surprise might spur better demand.

“There is still an enormous amount of cash in the market, an enormous amount of demand for Treasuries, and given the ongoing concerns about where global growth will go, given the continued rise in coronavirus cases in many areas of the world particularly with the Delta variant, I think the safe-haven demand for Treasuries will remain with us for the foreseeable future,” he said.

(Reporting By Karen Pierog; Editing by Alden Bentley and Dan Grebler)

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