Treasuries Rally Into Record 30-Year Bond Sale: Auction Preview

(Bloomberg) -- Gains across Treasury curve sparked by weaker-than-forecast April CPI data eroded concession for Thursday’s record $17 billion 30-year Treasury bond auction; rally only briefly cheapened the issue on the curve, as initial gains were led by shorter maturities that are more sensitive to monetary policy.

The current 30-year bond’s yield fell as much as 3.6bp to 3.126% (vs YTD high of 3.232% in February), after April CPI rose less than forecast, with the yield remaining inside its weekly range; WI 30-year yield, close to even with the current issue at about 3.13%, is still higher than 30-year auction stops since March 2017.

5s30s curve steepened after the data by ~2bp to 33.7bp, before returning to little changed, as 5Y sector pared more of its CPI-sparked gains.

The Treasury boosted auction sizes across the curve in February for the first time since 2009 to finance the widening budget deficit. It expanded them further in May, increasing the 30-year new issue from $16 billion, its size since 2010, and the June and July reopenings by $1 billion to $14 billion.

If investors are queasy about buying Treasury securities as auction sizes grow, they didn’t show it at the first two of this week’s three coupon auctions. Tuesday’s 3-year and Wednesday’s 10-year note auctions drew yields just 0.1bp higher than the WI yield at the bidding deadline, as the highest auction yields in years took the sting out of the increased sizes. The 10-year stopped at 2.995%, narrowly missing out on a 3% coupon rate.

WHAT TO WATCH

  • Positives for Wednesday’s auction, beyond its elevated yield, include “ongoing demand” from liability-driven investment community for long duration assets, mainly via Strips, JPMorgan strategists said in a note
  • Negatives for the auction, other than its size and expectations for further volume increases down the road, include 30Y sector’s richness on curve
  • Futures positioning is a two-edged sword; speculative net short in US contract is biggest in a year, while in WN contract it’s at record levels, but those positions have been growing and may not be ready to reverse

PREVIOUS AUCTIONS AND POSITIONING

  • Averages for last three refunding auctions:
    • Bid-to-cover: 2.27 (low 2.23, high 2.32)
    • Dealer award: 30.1% (low 27.8%, high 31.8%)
    • Direct award: 6.6% (low 5.4%, high 8.1%)
    • Indirect award: 63.3% (low 61.2%, high 66.8%) 
  • Primary dealers’ position in 11y+ sector was net long $24.6b in week ended April 25 vs $26.3b avg net long over past year

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