High yields on US Treasuries start attracting buyers; $39 billion 10-year Treasury auction sees strong demand as long-end yields give back gains

According to news from Zhitong Finance APP, U.S. Treasury bonds saw mixed movements on Wednesday after a strong $39 billion 10-year Treasury auction indicated that some large investors are re-entering the market as yields reach multi-decade highs. Following the auction results, long-term Treasury yields gave back some of their intraday gains.

The winning yield of the U.S. Treasury Department's $39 billion 10-year bond auction was 5.3%, significantly lower than the yield level in the secondary market before the auction, indicating robust investor demand. The bid-to-cover ratio rose to 2.77 times, the highest since 2016; the allocation to non-dealer investors reached a record high of 97.5%.

Monty Gandhi, interest rate strategist at Sumitomo Mitsui Banking Corporation (SMBC), stated that the auction shows that large investors with strong capital are finally finding current yield levels attractive. He pointed out that when yields approached 5% earlier, some major investors had already begun to unwind short positions in Treasuries and may now be gradually buying back in.

After the auction, the 10-year Treasury yield fell back to around 5.28%, a notable decline from the intraday high of 5.36%. The 5.36% level had not been seen since 2002. The 30-year Treasury yield rose only about 1 basis point to 5.67%, having previously climbed further due to rising oil prices. Short-dated Treasuries performed relatively well, with the 2-year yield dropping about 3 basis points to 4.76%.

Over the past several weeks, the global bond market has remained under pressure. High energy prices have exacerbated market concerns over resurging inflation and further rate hikes by central banks. Meanwhile, corporations have been raising large amounts of capital to build out artificial intelligence infrastructure, competing with government borrowing. On Wednesday, Brent crude oil prices at one point broke above $102 a barrel following another attack by Iran on a vessel in the Strait of Hormuz.

Evelyne Gomez-Liechti, multi-asset strategist at Mizuho International, said the bond market is currently being pulled by two opposing forces: on one hand, absolute yields on Treasuries have reached quite attractive levels; on the other, inflation risks driven by rising oil prices have yet to dissipate.

U.S. Treasury Secretary Janet Yellen reiterated at a White House event on Wednesday that the recent rise in bond yields is a "global phenomenon." She believes that unlike in other countries, the rise in U.S. yields mainly reflects higher real rates, not a deterioration of inflation expectations; a key reason behind this is the continued strength of the U.S. economy. Yellen also reiterated that once tensions with Iran ease, energy prices are likely to fall, and market rates across different maturities are expected to decline accordingly.

Nonetheless, the 10-year Treasury auction shows that current high yields are already starting to attract capital inflows. The market will next focus on Thursday's $22 billion 30-year Treasury auction, with yields on this batch of bonds possibly reaching their highest levels since 2000. After the 30-year auction, the Treasury Department will conduct another bond buyback, planning to purchase up to $6 billion in securities with 20 to 30 years of remaining maturity. This will be the fourth buyback of this kind since the Treasury expanded the program as long-term yields climbed to multi-year highs.

Meanwhile, there have been signs of stabilization at the short end of the Treasury yield curve recently. Last week's weaker-than-expected inflation and labor market data, combined with relatively dovish signals from several central bank officials, led the market to lower expectations for further Fed rate hikes.

The minutes of the Fed's September meeting showed that all 19 officials supported the rate hike that month, with many believing it necessary to raise rates further to guard against escalating inflation pressures. However, the interest rate swaps market currently puts the probability of a Fed rate hike this month at about 25%, while expectations of another hike by the end of the year have been fully priced in by the market.

John Briggs, Head of U.S. Interest Rate Strategy at Natixis, stated that the market has shown some signs of stabilization over the past week, especially at the short end of the yield curve, and now investor demand is also emerging at the long end. Although it's still too early to call an end to the selloff in Treasuries, this robust 10-year auction has at least sent a positive signal.