(Bloomberg) -- The U.S. Treasury’s new 20-year bond is headed for its first auction on May 20. However, according to custom, the first transactions were recorded Thursday after the government confirmed the auction’s $20 billion size, and those trades imply a yield of about 1.09%.
Because the bond’s coupon rate will be determined by the auction yield, it doesn’t have a price yet, but traders can buy and sell it in the when-issued, or WI, market. WI trading involves expressing a pending issue’s yield relative to the that of the closest existing issue. Complicating matters with this auction, there is no existing 20-year bond.
There are several old 30-year bonds that mature in 2040, but none has enough liquidity to serve as a comparator. The most-liquid issues in the neighborhood are the bonds that are cheapest-to-deliver, or CTD, into Treasury futures contracts. The WI 20-year roll -- its yield spread to an existing issue -- is being calculated using the 3% bond maturing in November 2045, the CTD for the Ultra Bond futures contract. Early Thursday afternoon the roll was trading around -16.5 basis points, close to where JPMorgan rates strategists predicted it would, which results in an implied yield of about 1.09%.
Trading in the roll has been “pretty active,” totaling about $1.5 billion across various platforms after two hours on Thursday, said Dan Mulholland, head of Treasury trading at Credit Agricole. Scarcity helps; Federal Reserve purchases of Treasuries since mid-March total more than $1.5 trillion.
“The Fed’s bought a lot in that sector -- almost 70% of every issue,” leaving “a spot to fill in portfolios,” Mulholland said.
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