Evening Brief – 08.10.23
Amid much concern surrounding this week’s quarterly refunding due to ominous predictions about a flood of Treasury issuance in the coming quarter, the auction results were rather good.
As we noted in our July 31 Evening Brief, The US Treasury increased the size of its sale of longer-term debt for the first time in over two and a half years to $103 billion in tune with the worsening US budget deficit, which had initially spooked bond investors.
Following Tuesday’s $42 billon 3-year auction, the US Treasury is sure to have been relieved by the results. The stellar demand helped to alleviate some of the recent concerns about US supply caused by the Fitch downgrade; whether the Fed’s rate hike cycle is over; and the possibility of reduced overseas interest due to higher Japanese government bond yields and plunging Chinese exports, which are funds the government typically recycles into US Treasurys.
The three-year notes sold with a lower-than-expected yield, a sign that demand was stronger than anticipated.
Meanwhile, the sale of $38 billion 10-year notes on Wednesday was not just strong, but also one of the best of the year.
Pricing at a high yield of 3.999%, this was higher than last month’s 3.847% and only slightly below the cycle high of 4.106% in November 2022. It also tailed the When Issued 3.998% by 0.1 basis points, marking the 6th straight tail but also the smallest tail since February, when the last stop through occurred.
The Bid-to-Cover ratio, which measures demand for Treasury securities, was 2.56, slightly higher than the previous month’s 2.53 and higher than the recent average of 2.45; in fact, it was the highest since February’s 2.66. A high ratio indicates that there is plenty of demand.
Finally, the Treasury sold $23 billion in 30-year bonds on Thursday; while rates did not rise dramatically, it was likely the poorest of the three auctions and likely led to the sharp reversal in the equity market after equally rising sharply after the largely as expected US CPI data.
Stopping at a high yield of 4.189%, the auction priced at the highest yield since July 2011, and was well above last month’s 3.910%; it also tailed the When Issued 4.175% by 1.4 basis points, the highest tail since February.
The Bid-to-Cover was 2.42, the lowest since April and below the 6-auction average of 2.39.
Few expected this week’s auctions to be successful after the Treasury announced its refunding schedule last week and rates soared on the expectation of much more issuance.