Ugly 10-Year Auction Spark Equity Decline — Evening Brief – 08.07.24
As a result of the turmoil that has been occurring in the financial markets over the past several days, it is perhaps not surprising that demand for U.S. government bonds has weakened. In fact, today’s auction of U.S. Treasury 10-year paper was considered ugly.
The 10-year sale stopped at 3.96%, down slightly more than 3 basis points, as the bid-to-cover, a metric used to gauge demand for securities during auctions and offerings, was 2.32, the lowest since December 2022. A low bid-to-cover ratio indicates weak demand.
Indirects accounted for 66.2% of the total, which is a typical ratio, indicating that there was not a complete refusal by the investment class to acquire the paper. Directs, meanwhile, accounted for a slightly below-average 16%, resulting in dealers holding a higher-than-usual 17.9%.
The 10-year yield broke above its levels seen before the releases of July payrolls data and the uptick in yields across the curve sent stocks lower, erasing most (or all for the DJIA and small caps) of the overnight gains following dovish comments from a Bank of Japan (BOJ) official.
BOJ Deputy Governor Shinichi Uchida indicated that the central bank would refrain from increasing interest rates during periods of financial market instability. Given that the volatility emerged after the central bank’s decision to increase interest rates, the statement appears to be somewhat late. Following Uchida’s apparent surrender to market pressure, the Japanese yen depreciated, while most global stock markets rallied in the overnight session.
Uchida’s comments, in contrast to Governor Kazuo Ueda’s hawkish statements last week, stated that the recent market volatility could potentially alter the BOJ’s plan to increase interest rates if it impacts the central bank’s economic and price forecasts, as well as the probability of Japan successfully reaching its 2% inflation goal.
Nevertheless, as Cameron Crise from Bloomberg pointed out, the strong aversion to paper below 4% is not a positive sign and raises concerns about whether bond operators will be willing to handle the $25 billion 30-year sale scheduled for tomorrow.
Complicating the situation were remarks made by JPMorgan Chairman and CEO Jamie Dimon, who told CNBC that he was “skeptical that inflation will get back to 2%,” adding that a 50-basis point cut by the Federal Reserve “doesn’t matter as much as people think.”