11 Jan Bond Report: Treasury yields retreat after record-setting 30-year auction
U.S. Treasury yields pulled back on Thursday, giving back most of their earlier advance after a solid auction for 30-year bonds.
What are Treasurys doing?
The yield for the 10-year benchmark note TMUBMUSD30Y, -1.21% slipped 2 basis points to 2.531%, snapping five-straight sessions of yield gains, according to Tradeweb. On Wednesday, the yield was trading around the highest level since March last year.
Yields fall as prices rise.
What is driving the market?
Yields slipped and bond prices clawed back their earlier losses after a solid 30-year bond auction. Indirect bidders—a proxy for foreign investors and central banks—snapped up 71.5% of the auction. This share marked the highest levels since May 2003, when the data was first publicly disseminated. After yields rose to appetizing levels, investors abroad stepped in to take the lion’s share of the auction, allaying concerns of a bearish turn in the bond market.
But others said short sellers were squeezed out by the sudden downshift in yields prompted them to buy back, or “covering”, the securities they had borrowed, juicing the late day rally.
Yields were rising earlier in the day after minutes from the European Central Bank’s December meeting showed senior officials talked up a possible shift in policy guidance to reflect strengthening growth in the eurozone.
Analysts said the move could warrant a swifter end to its bond purchases than many had expected as ECB President Mario Draghi has repeatedly declaimed the success and need for ultraloose monetary policy. Higher interest rates in the eurozone can attract money managers at the expense of U.S. Treasurys, which may see outflows.
What are strategists saying?
“Bottom line, today’s auction caps a great week for 3s, 10s, and 30 year auctions. It is clear that the recent spike in yields brought out demand and Treasuries are rallying in response,” wrote Peter Boockvar, chief investment officer for the Bleakley Financial Group.
“The results of this auction smack of big short-covering. We have said many times in the past that these auctions are viewed as liquidity opportunities and today is no different,” said Thomas Simons, senior money market economist at Jefferies. Short covering refers to investors betting on fall on Treasury prices, but being forced to unwind those bets as prices rise, which can further magnify price increases.
What else is on investors’ radar?
China’s foreign-exchange regulator on Thursday pushed back on a Bloomberg report that government officials were recommending China should to pare back or even halt purchases of U.S. Treasurys. A spokesperson for the State Administration of Foreign Exchange (SAFE) said in a statement published on its Chinese website, that the “news may quote the wrong source of information, or it may be fake news.”
On Wednesday, Bloomberg, citing unidentified people familiar with the matter, said China found that U.S. bonds were becoming less attractive and that trade tensions with the U.S. could provide a reason to stop buying American government paper. The report sparked a selloff in U.S. bonds that sent 10-year Treasury yields TMUBMUSD10Y, -0.82% higher, close to 2.6% in Wednesday’s action.
U.S. inflation data for December are due on Friday morning, with traders closely watching for hints that consumer prices are picking up at a faster pace that could speed up the Federal Reserve’s expected rate increases.
What other assets are on the move?
European bond yields were higher after minutes from the December meeting raised fears the ECB would end its program of monthly bond purchases sooner than expected. The German 10-year bond yield TMBMKDE-10Y, +8.24% rose 4.1 basis points to 0.520%, more than a five-month high.