The US Treasury sold 42 billion dollars of ten year notes on Tuesday at a high yield of 5.020 percent, 1.0 basis points above the 5.010 percent when issued level at the bidding deadline. The tail was the largest at a ten year auction since February, according to auction reports, and it came on the day the October consumer price index pushed the cash ten year yield through 5 percent for the first time in weeks.
Demand thinned on every measure. Bid to cover was 2.46, down from 2.77 at the October sale and below the 2.60 average of the previous six ten year auctions. Indirect bidders, the category that includes foreign central banks and other overseas buyers, took 61.2 percent of the competitive award, down from 80.3 percent in October and 15.4 points below their recent average. Primary dealers took 9.8 percent, up from 2.5 percent in October.
The sale cleared because domestic buyers stepped in. Direct bidders took 29.0 percent, up from 17.1 percent in October. The pattern matches Monday’s three year auction, which also tailed, by 0.5 basis points, and also leaned on a record direct bidder share while the indirect share fell. Two refunding legs in two days have now shown the same soft foreign bid at yields well above where the Treasury sold the same maturities a month ago: Tuesday’s 5.020 percent stop was 28 basis points below October’s 5.300 percent only because the whole curve has repriced since, not because demand strengthened.
The timing mattered. The auction landed hours after October CPI rose 0.4 percent on the month with core up 0.3 percent for a third straight month, a print that left futures pricing a December Federal Reserve hike as close to certain and put a 10 percent probability on a 50 basis point move. This site’s market tables put Tuesday’s closes at 4.98 percent on the ten year, up 11.9 basis points, 4.81 percent on the five year, up 14.8 basis points, and 5.35 percent on the 30 year, up 9.4 basis points.
The refunding finishes on Thursday, when the Treasury sells 25 billion dollars of 30 year bonds at 1:00 p.m. Eastern, with the cash bond market closed on Wednesday for Veterans Day in between. The new ten year notes settle on November 16 and mature on November 15, 2036. Whether foreign demand returns at the long end, after two soft legs at the front and the belly, is the week’s remaining supply test.