Treasury Yields Surge Amid Poor Auction Results

Treasury yields experienced a sharp increase on Wednesday due to lackluster demand during a sale of five-year notes. This outcome has heightened concerns about the forthcoming announcement of increased auction sizes scheduled for next week.

Rising Yields and Disappointing Demand

During the auction, which involved a $52 billion offering, the yield reached 4.899%. This was nearly 2 basis points higher than its pre-bidding deadline trading rate at 1 p.m. New York time. It is a clear indication that the demand fell short of the dealers’ initial expectations. Furthermore, participation metrics from bidders remained weak, leading dealers to be awarded the largest portion of the tenor in over a year, as investor demand dwindled.

Pre-Auction Yield Trends

Prior to the auction, yields had already been on an upward trajectory. The release of stronger-than-expected data on September’s new home sales reinforced this trend.

Long-Maturity Yields in Focus

The 30-year bond’s yields, in particular, experienced a significant surge, surpassing 15 basis points to nearly 5.10% at one point. This marked the resumption of a selloff that had earlier driven the 30-year yield to nearly 5.18% on Monday, its highest level since 2007. However, it later reversed its course to close below the 5% threshold by the end of the day.

Factors Behind the Yield Surge

The recent surge in Treasury yields can be attributed to multiple factors. Firstly, the Federal Reserve’s decision to keep its policy rate elevated for a longer duration than previously expected has played a role. Additionally, the growth in the supply of notes and bonds has contributed to this increase. Notably, August saw the first increase in auction sizes in over two years, and another round of increments is anticipated in the upcoming quarterly announcement on November 1.

What Lies Ahead

This week’s auction cycle will conclude on Thursday with a $38 billion seven-year note sale. Following this, there will be a hiatus in Treasury coupon sales until November 7, potentially providing some market stabilization.

Wall Street’s Projections

In recent weeks, Wall Street banks have begun releasing their forecasts for the auction sizes that will be announced on November 1. Many of the major bond dealers expect a repetition of the changes made in August. For instance, each monthly 10-year note auction in the quarter was $3 billion larger than the previous three months.

On the other hand, some dealers, such as those at Barclays Plc, Goldman Sachs Group Inc., and Morgan Stanley, anticipate that the 10- and 30-year auctions will see smaller increases compared to the previous round.