Treasury Sales Under Scrutiny as Foreign Demand Rises to Record

(Bloomberg) -- An autopsy of this month’s blockbuster 10-year Treasury auction shows global funds bought a record amount. Traders will be scrutinizing this week’s sales for a possible repeat.

A breakdown of the Aug. 11 sale released by the Treasury on Monday showed the Foreign and International category, a group that includes foreign official entities, were awarded $15.4 billion of the $41 billion of notes sold, an all-time high. Their 38% share was the biggest proportion in over a decade.

This week brings the next wave of Treasury supply across front-end and belly of the curve, starting with a $60 billion 2-year note sale at 1pm New York. Market participants will be analyzing the results for a similar pattern of foreign central bank demand, often reflected in the indirect auction allotment. The 2-year auction is poised to draw about 0.25%, the highest yield in more than a year, while the 10-year sold at the lowest yield since February. 

Treasuries Heavy Ahead of UST 2-Year Note Sale: Auction Preview

This month’s 10-year sale also caught traders off guard as the notes were awarded at just 1.34%, more than three basis points below the level of prevailing yields ahead of the auction, the biggest premium since July 2012. 

Various theories have been bandied about as to what drove the sudden influx. One was that foreign central banks were the major bidders as they sought to reallocate their foreign-exchange reserves due to a decline in the availability of Treasury bills.

Another reason that has been mooted was a step up in Chinese demand after the Asian nation’s currency reserves climbed to highest since 2015 in July. Recent tweaks to a Federal Reserve repo facility have also been cited as a possible driver.

Central banks and official money may be at the forefront again as they often prefer to buy shorter maturities due to their lower volatility. On the other hand, foreign investors have recently shown a preference for refunding sales, which include longer maturities such as 10-year notes. Shorter-dated Treasuries, which are sold new each time, have not exhibited the same trend. 

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