Record 10-Year Treasury Auction Gets Scooped Up by Investors
(Bloomberg) -- Investors scooped up a record $26 billion 10-year Treasury auction Wednesday, showing that swelling U.S. government issuance has yet to put pressure on the nation’s long-term borrowing costs.
The sale of 2028 notes was $1 billion larger than the Treasury’s May offering, which matched the previous record set in 2009. But a gauge of demand was above the average for the last four quarterly refunding auctions. The sale drew a yield of 2.96 percent, in line with where the new security was trading in the minutes before the auction, signaling that investor appetite at around the 3 percent level continues.
The unprecedented size comes as America’s deteriorating fiscal outlook and ballooning debt load are moving onto investors’ radar. The refunding sales this week, which also include Tuesday’s three-year auction and a 30-year offering Thursday, will tally $78 billion. That’s the largest hit of new supply for a quarterly refunding since 2010.
“The demand is very much in line with past auctions,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “The fact that it was the largest auction size in history really didn’t make much of a difference. Investors are starting to come in and buy, with yields getting close to the 3 percent level.”
The outlook for the U.S. deficit, which was already projected to worsen amid rising debt-service costs and entitlement spending, has darkened further with President Donald Trump’s tax cuts and new federal outlays. The Congressional Budget Office predicts the shortfall will reach $1 trillion in 2020. The Treasury is also boosting sales to make up for lost Federal Reserve buying, as the central bank rolls debt off its balance sheet.
In the leadup to the sale, some derivatives traders had been using options to wager on a 3 percent coupon, which would have been the highest since 2011. But yields fell from their peak in U.S. morning trading and the coupon came in at 2.875 percent, the same as in recent months.
The solid auction followed the tepid result for the three-year notes Tuesday, at which the yield “tailed” and demand was below average. The combination is in line with this year’s trend toward a flatter yield curve. Demand for longer-term Treasuries has remained robust even as U.S. economic growth in the second quarter topped a 4 percent annual pace.
With the Fed lifting rates and the Treasury skewing its increased issuance toward medium-to-shorter maturities, the curve has flattened at a torrid pace. The gap between 2- and 10-year yields slid below 24 basis points last month, its smallest since 2007, before rebounding to 29 basis points.
The trend has spurred several Fed officials to warn of the recessionary signal that inversion would send. For John Herrmann, a strategist at MUFG Securities Americas Inc., the appetite for longer maturities shows in part expectations for an economic slowdown in the next few years.
“That and expectations that Fed tightening will remain in play over the next 18-to-24 months is keeping the curve holding in this flattening channel,” he said. “We can see that in the auction demand this week too.”
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