So far, so good for this week’s historic Treasury debt auctions — following trepidation last week when the announced sizes topped most bond dealer expectations.
(Bloomberg) — So far, so good for this week’s historic Treasury debt auctions — following trepidation last week when the announced sizes topped most bond dealer expectations.
Tuesday’s $42 billion sale of three-year notes produced a lower-than-expected yield, a sign that demand was stronger than anticipated. It also wound up almost entirely in the hands of investors, who obtained a record share relative to dealers. While that trend has disparate drivers, it signals that the US government need not be concerned about whether investors will show up in adequate numbers as it requests to borrow increasingly large sums.
This week’s auction cycle continues Wednesday with $38 billion of new 10-year notes, $3 billion larger than the last 10-year note debut in May, and concludes Thursday with $23 billion of 30-year bonds, $2 billion larger than the last comparable offering. The three-year auction also was $2 billion larger than its predecessor.
Tuesday’s three-year notes, in pre-auction trading just before the 1 p.m. New York time bidding deadline, yielded about 4.416%. The 4.398% auction result, lower by nearly 2 basis points, though not unprecedented is a relatively wide margin in this part of the market, where valuation normally is widely agreed upon. The auction result represents the lowest yield investors in aggregate were willing to accept for the quantity being sold.
The better-than-expected outcome for the government was especially notable because the market had rallied into the sale, pushing yields lower across the maturity spectrum in a way that can put investors off in an auction and lead to weak results. Also, investors have yet to completely abandon wagers that the Federal Reserve will raise interest rates again this year, even as Philadelphia Fed President Patrick Harker said Tuesday that an additional hike may not be needed.
Meanwhile, bidder-participation metrics for the auction included the lowest-ever award for a three-year sale (10.3% of the auction) to so-called primary dealers — whose participation is required — and a record high award (74%) to the biggest class of investors, known as indirect bidders.
Primary dealers awards have been trending lower for years across most Treasury note and bond auctions. Last month, primary dealers were awarded just 1.5% of an auction of 10-year Treasury Inflation-Protected Securities, an all-time low for US auctions.
Among the drivers is growth in the market that’s outpaced the capacity of primary dealers to absorb it. Currently there are 24 primary dealers.
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