Two-year Treasury auction sees weak foreign demand and huge jump in yields

Two-year Treasury auction sees weak foreign demand and huge jump in yields

Treasury yields rose again on Monday after a weaker-than-expected two-year bond auction led to fading demand from foreign investors and a massive jump in US government borrowing costs.

The Treasury sold $43 billion in two-year bonds at an auctioned high yield of 4.29%, about a pint more than the previous auction in late August and another full point ahead of the Fed’s current target price of between 3% and 2.25%.

Investors bid $2.51 for every $1 of the 10-year Treasury bills offered, auction data indicated, a more consistent number than the 2.51 “bid to cover” ratio recorded at the last auction on August 23, when the yield had just been. 3.307%.

Prices and yields in the bond market are moving in opposite directions, making today’s newspaper much cheaper than it was in early August.

The data indicated that foreign buyers reduced about 53% of sales, down from the 66.1% figure reported in August, indicating that foreign buyers are seeing attractive returns in other markets as central banks around the world point to further rate hikes. in the near term.

Direct bidders, which account for domestic demand, took the slack, losing 100% of their selling allocation, a figure that could indicate institutional fund managers are taking cash from stock markets, where the dividend yield on the S&P 500 is just 1.7%, and put it to work. in treasury bonds.

Shares continued their decline in the wake of the auction results, with the Dow Jones Industrial Average dropping 371 points during the session and the S&P 500 down 41 points.

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The benchmark 10-year note rose 4 basis points to 3.896% in the wake of the auction, while the two-year note was flat at 4.338%.

In fact, US Treasury yields have risen more than 110 basis points since August 1, as noted by Bank of America in its weekly “Flow Show” report on Friday, helping to set global bond markets on pace for their biggest annual declines in more than seven years. contracts. .

What Bank of America calls a “bond meltdown” could “threaten credit events and liquidate the world’s busiest deals: buying the US dollar, buying US technology, long private equity.”

“The real surrender is when investors sell what they love and own,” Bank of America said.

Fixed income traders are also betting another 75 basis point rate hike from the Fed in November, according to CME Group’s FedWatch, while the Atlanta Fed’s Now GDP forecast tool indicates third-quarter growth slows to 0.3%. Just.

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