Treasuries Stall After Flunking Test of Demand for Lower Yields

(Bloomberg) -- The Treasury market failed a key test for its lower yield levels Wednesday as an auction of 20-year bonds fared poorly, despite cheapening into the bidding deadline.

The rally that drove long-term Treasury yields to five-month lows this week remained stalled after the auction, with the benchmark 10-year note’s yield more than six basis points higher on the day. At about 1.29%, the yield was more than 25 basis points higher than its low on Tuesday, when the prospect of prolonged economic stagnation caused by the spread of virus variants boosted appeal for haven assets.

The $24 billion auction of 20-year bonds drew 1.89%, more than a basis point higher than its yield in pre-auction trading just before the bidding deadline at 1 p.m. New York time, a sign that demand fell short of dealers’ expectations. Other metrics also were weaker than for last month’s sale, which drew 2.12%.

Tepid interest for the auction isn’t surprising in light of how much yields have declined over the past month while the fundamentals of growth and inflation haven’t changed, said Charles Comiskey, head of U.S. rates trading at Bank of Nova Scotia.

“We’re all shaking our heads at where yields are given the growth outlook and the reality of inflation,” Comiskey said. “Inflation is very high and yields are very low, it’s that simple. Volatility is high, which has taken some people out of the game too.”

Another test looms on Thursday -- a $16 billion auction of 10-year inflation-protected Treasuries, or TIPS, that may draw a record low yield. The yield on the current security fell to -1.12% Monday, within a basis point of a record low. It has rebounded to around -1.02% since then, however the lowest-ever auction yield was -0.987% in January.

The securities pay interest at the minimum 0.125% rate on principal that’s adjusted for movements in the consumer price index, with yields that reflect expectations for economic growth.

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