Messy 30-Year Treasury Sale Follows Dovish Powell, Firmer CPI

(Bloomberg) -- Investors balked at the U.S. Treasury’s auction of 30-year bonds as Federal Reserve Chairman Jerome Powell cited low inflation as grounds for a potential interest-rate reduction that’s widely expected at the end of this month.

Bidders at the Thursday sale drove the yield on the re-opened bond line, which was first auctioned in May, to 2.64%. That was almost three basis points above the prevailing market level at the bidding deadline, and compared with 2.607% at last month’s sale. The drop-off in demand -- which was also reflected in a weaker-than-average bid-to-cover ratio -- showed investors pushing back on the rallies that took the 30-year yield to a multi-year low of around 2.45% earlier this month.

Yields on 30-year debt climbed as much as 8 basis points on the day to 2.66%, extending the sell-off in longer-end Treasuries that followed the release of stronger-than-expected consumer price inflation data earlier in the U.S. morning. The 30-year yield was more than 10 basis points below current levels just before Federal Reserve Chairman Powell’s dovish testimony Wednesday.

“The curve should be a lot steeper,” said Glen Capelo, a trader with Academy Securities. “This is the first time in my lifetime the Fed is actually trying to create inflation,” he said by email after the auction.

Take-up at Thursday’s auction was particularly poor among indirect bidders, a class of investors that includes pensions and mutual funds. Their share of 50% was the lowest since February 2015, and well below the 60.8% they took at the prior auction in May.

--With assistance from Elizabeth Stanton.

To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editor responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net

©2019 Bloomberg L.P.