US 30-Year Treasury Auction Signals Weak Demand to Wrap Up Week of Big Sales

(Bloomberg) — US Treasuries came under renewed pressure, pushing yields higher, as the market struggled to absorb this week’s final leg of new debt sales.

Most Read from Bloomberg

The moves extended a volatile session Thursday, when soft inflation data for July initially pushed yields lower and fueled speculation that the market would easily accommodate the $23 billion auction of 30-year bonds at 1 pm New York time.

But even with the bonds sold for a yield of 4.189%, the highest since 2011, the amount allotted to primary dealers was the largest since February, a sign of weak demand. Afterward, 30-year yields jumped as high as 4.26% late in New York.

The sale was the biggest test of this week’s auctions, when the Treasury sold a combined $103 billion of new 3-, 10- and 30-year debt, because the long maturity securities usually appeal to select investors such as pension funds and insurers. The size of the 30-year bond sale was $2 billion larger than last new-issue offering in May, and the market expects further increases given the expected deficits the US government is facing.

“It’s a case of refunding digestion,” and with shorter-dated Treasury yields higher, “you are getting paid to keep duration short,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. He said the sale also reflects weak summer liquidity.

Treasury yields dropped early in the trading day after the consumer price index’s advance was in line with expectations, supporting anticipation that the Federal Reserve is likely done raising interest rates. Ten-year Treasury yields dropped as much as 6 basis points to 3.94% before reversing course and jumping back to as much as 4.11% in the late afternoon.

“The selloff feels likes a reaction to the weak auction,” said Subadra Rajappa, head of U.S. rates strategy for Societe Generale. “It caught me by surprise. Dealers had to take down a big chunk of the paper. It feels like there’s not enough of real money participation.”

But, she added, “it’s hard to draw a conclusion for an auction in August” when investors leave for vacations.

The post-auction weakness extended across the market, with yields between the five- and 10-year benchmarks higher by 9-10 basis points and at fresh session peaks at late trading in New York. Traders said the mid-section of the Treasury curve was in focus, with trades favoring under-performance in 5-year bonds.

While the bond market initially warmed to the latest CPI report, traders are still pricing in some risk of another quarter-point Fed hike later this year, with swaps for the November meeting showing a 5.42% policy rate. It’s at 5.33% now.

“The market sees the economy is now in a more disinflationary trend, but the labor market is still strong and that will keep the Fed on its toes,” said Michael Pond, head of global inflation-linked research at Barclays.

(Updates yields)