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US Treasury’s Biggest-Ever 10-Year Auction Garners Solid Demand

(Bloomberg) -- The US government sold a record $42 billion of 10-year notes Wednesday at a lower-than-anticipated yield, soothing investor nerves after a recent rout and indicating confidence that the Federal Reserve will eventually cut interest rates.

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The notes were awarded at 4.093%, compared with a yield of about 4.105% moments before 1 p.m. New York time, the bidding deadline. The lower yield indicates stronger demand than traders anticipated. The auction result also broke a streak of tails — or a weaker result for the previous four monthly sales. US Treasuries as a whole held steady as the details were absorbed.

The 10-year yield has traded on either side of 4% since mid-December, when Federal Reserve Chair Jerome Powell indicated interest-rate cuts loomed for 2024. The benchmark has neared but never breached the 4.20% level seen when Powell spoke late last year, with expectations for a pivot helping support the market.

“Investors see that interest rates are higher than they have been for most of the past decade, and they can lock that in,” said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments.

Before the auction, Treasury yields were briefly driven to session lows by the latest bout of weakness in US regional bank shares led by New York Community Bancorp, whose loan portfolio has been hurt by rising interest rates. At the same time, the S&P 500 traded at record-high levels, highlighting crosscurrents in the US economy. Those were reflected in the Treasury market in the past week, when strong January employment data touched off the biggest two-day selloff in more than a year.

Big Take DC: America’s ‘Debt Spiral’ Nears a Critical Threshold

At $42 billion, the 10-year sale eclipsed the $41 billion high-water mark reached in November 2020. With the latest changes to Treasury auction sizes announced last week, three of its seven notes and bonds, including the two- and five-year, are scheduled to hit record sizes in the February-to-April quarter.

The sale was one of three big tests for the market this week. Tuesday’s $54 billion auction of three-year notes also drew a lower yield than the one that had been predicted by trading at the bidding deadline, a positive sign. The US Treasury will complete its quarterly debt refunding Thursday with the sale of $25 billion of 30-year bonds.

“It looks like a strong takedown all around,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. “Even though Treasury auctions are continuing to rise, demand for duration at these levels remains sturdy,” and yields at 4% are historically attractive, he added.

What Bloomberg’s Strategists Say ...

“The takeaway here is that the increased size of the auction did not frighten investors — quite the contrary. This should offer a platform for a nice little rally, although with the 30-year sale looming tomorrow and CPI revisions on Friday, the scope to really rip is probably limited.

— Cameron Crise, MLIV macro strategist

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Demand for the 10-year sale comes when Treasury investors are grappling with at least two sets of challenges. One is the uncertain outlook for monetary policy. The Fed has signaled it’s likely to cut interest rates this year amid ebbing inflation, but the economy’s strong performance is challenging market-implied expectations for when and for how much.

Another challenge: the growth in the size of bond markets, including for Treasuries. All else being equal, additional bond supply weighs on a security, but that hasn’t necessarily been the case this year — a positive signal for investors ahead of the 10—year sale.

--With assistance from Ye Xie.

(Adds commentary.)

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