Title: Liquidity Weakens as U.S. 30-Year Treasury Bond Auction Fails to Attract Key Buyers
Date: August 11, 2023
The recent auction of U.S. 30-year Treasury bonds has raised concerns about liquidity in the market, as the results indicate a lack of interest from key buyers such as pension funds and insurance companies.
On August 10, the U.S. Treasury Department completed the auction of 30-year Treasury bonds, totaling $23 billion. The winning bid rate was 4.189%, marking the highest level since July 2011. However, the allocation of bonds to direct buyers, including the Federal Reserve and other U.S. federal government entities, was only 19.6%, while primary dealers received 12.5%, the highest since February.
The high proportion allocated to primary dealers suggests poor demand for the bonds, as these dealers are obligated to accept all Treasury issuances when there are no buyers to avoid unsold auctions. Indirect buyers, including overseas central banks and private investors, received a record-low allocation ratio of 67.8%, the lowest since February.
Earlier in the week, demand remained strong for shorter-dated U.S. debt, with auctions for 3-year and 10-year Treasury bonds receiving favorable responses from overseas indirect buyers. However, the results of the 30-year bond auction were unexpected, as primary dealers received a large portion of the allocations, while participation from “real money” investors, such as pension funds and insurance companies, remained sluggish.
Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities, described the results as a reflection of “refinancing digestion” and suggested that investors were favoring shorter-duration bonds due to higher yields. Weak liquidity during the summer months may have also contributed to the lack of demand.
Subadra Rajappa, head of U.S. rates strategy at Societe Generale, noted that the weak auctions may have contributed to a sell-off in the market, but cautioned against drawing conclusions from a single result, as many investors tend to take vacations in August.
The auction results came shortly after the release of the U.S. July Consumer Price Index (CPI) data, which initially supported expectations that the Federal Reserve would halt interest rate hikes. However, the 30-year bond yields reversed their trend and continued to rise after the auction results were announced. On Thursday, the 30-year U.S. bond yield increased by 7.06 basis points to 4.2427%.
While the market initially responded to the CPI report by lowering Treasury yields, traders are still pricing in the possibility of another 25 basis point rate hike from the Fed later this year. Swap rates for the November meeting indicate a policy rate of 5.33%, slightly lower than the previous estimate of 5.42%.
Michael Pond, global head of inflation-related research at Barclays, highlighted that the market believes the economy is moving towards a disinflationary trend but emphasized that the strong labor market will keep the Federal Reserve cautious.
The unexpected nature of the 30-year Treasury bond auction results and the challenges it faced in attracting key buyers raises concerns about the liquidity and demand for U.S. government debt in the long term. With the U.S. government facing enormous deficits, the market anticipates further expansion of bond issuances in the future.