Sold
John Michael Montgomery created an official knee-slapper with “Sold,” singing, “Well, I went down to the Grundy County Auction, where I saw something I just had to have, my mind told me I should proceed with caution, but my heart said, go ahead and make a bid on that.” Investors showed a similar impulse last week as the U.S. Treasury auctioned $39 billion of 10-year notes and $22 billion of 30-year bonds. Though both auctions were very well received, the broader rate market remained skeptical and pushed yields higher across most of the curve. The key takeaway is straightforward: auctions showed real demand at these yield levels, but tactical demand alone is not enough to overcome the larger macro narrative, namely inflation, Fed policy, economic growth, Treasury supply, and fiscal deficits. Last week, just hours before the 10-year auction, the Treasury Department said it would buy up to $6 billion of outstanding securities maturing in the 10- to 20-year sector, tripling the initially communicated buyback size. Treasuries sold off immediately after the announcement, with the 10-year yield rising five basis points (bps) to its highest level since 2023.
Some commentators have dismissed the larger buyback as a drop in the bucket. Yet the more important constraint is the limited pool of eligible CUSIPs, or security identification numbers, available for purchase. According to Jay Barry, a strategist at JPMorgan Chase, long-end buybacks tend to be concentrated in substantially fewer CUSIPs than elsewhere on the curve. On average, one CUSIP accounts for more than 80% of accepted offers (Figure 1); including just two CUSIPs, the concentration rises to 96%. The 3.25% May 2042s have accounted for the lion’s share of accepted offers in recent months.
Said differently, the size of the buybacks is ultimately limited by the supply of eligible CUSIPs, alongside the Treasury’s willingness to purchase them. Given the lower supply of longer-dated securities, it would not be surprising to see a natural cap on the Treasury’s ability to upsize these operations further.
For his part, Treasury Secretary Scott Bessent framed the buybacks as a response to liquidity concerns, thus challenging the market narrative that higher long-end yields reflected anxiety over the sustainability of U.S. debt. He has also described the program as a way to let banks and other institutions offload harder-to-trade securities, potentially freeing balance sheet capacity for participation in new Treasury auctions.
Part of Bessent’s wish appeared to come true, since last week’s auctions were, as noted, very well received ($39 billion of 10-year notes auctioned). Recall that, before auctions, Treasuries trade in a “when-issued market,” which reflects where traders expect the auction to clear. This auction was also a reopening: Treasury sold additional size of a previously issued security. Reopenings are common and help create deeper, more liquid Treasury markets instead of fragmenting supply across many smaller issues. We cover the key 10-year auction metrics below.
The stop through
The 10-year auction had a stop through of 1.4 bps, yielding 4.834% at the auction versus 4.848% in the when-issued market. In other words, investors accepted a yield 1.4 bps lower than expected, indicating strong demand.
Non-dealer bidding
Non-dealer bidding equated to 95.7%, versus a 90.8% average over the past six auctions. (Primary dealers are required to bid at Treasury auctions as part of their responsibilities, effectively serving as the auction backstop when investor demand is insufficient; non-dealers, by contrast, represent real-money demand from asset managers, pension funds, insurance companies, foreign central banks, sovereign wealth funds, and other end investors.) In this equation, dealers were awarded just 4.3%, indicating that real-money investors absorbed nearly all of the supply.
Bid-to-cover ratio
The bid-to-cover ratio was 2.71, compared with an average of 2.52. (The ratio is calculated by dividing the amount of Treasuries sold from the total bids received.) This means that with $39 billion auctioned, total bids received were about $106 billion, indicating strong demand.
Direct vs. indirect bidding
Direct bidders submit bids in their own name. Direct participation in this auction was broadly in line with recent averages. The stronger signal came from indirect bidders, who took down 79.2%, compared with a 73.2% average. Indirect bidders submit bids through primary dealers acting as intermediaries. The higher-than-average share taken by indirect bidders suggests significant demand from end investors, including foreign official and institutional accounts.
The 30-year bond auction was even stronger than the 10-year auction: The former stopped through by 2.7 bps; the bid-to-cover ratio was 2.61x, versus a historical average of 2.4x; dealers were awarded just 2.2%, compared with an average of 11.5%; and indirect bidders took down 79.5%, versus an average of 66.2%. Taken together, the 10-year and 30-year results suggest that while the front end and belly of the Treasury curve remain hostage to the broader macro narrative described above, the long end has attracted meaningful buying interest at current yield levels.
The demand was particularly compelling given that Treasuries were selling off into both auctions. As such, the results look less like momentum chasing and more like investors deliberately stepping in to add duration. The long bond outcome was particularly impressive given that since 2017, 75% of 30-year auctions tailed by an average of 1.2 bps, when preceded by a 10-year auction that stopped through by at least one bp.
Separately, Treasury’s latest buyback operation totaled only $5.19 billion, below the $6 billion maximum announced the previous day. While that shortfall is not large in the context of the overall Treasury market, it suggests the buyback program was not the primary source of support for Thursday’s price action. The stronger auction demand was the more notable market signal. Treasury officials offered no additional guidance on the remaining buybacks, leaving the base case at $4 billion, consistent with the previously communicated “at least double” size.
Investors and analysts have viewed the expanded buybacks as a reflection of the Trump administration’s unease over rising long-term borrowing costs. But engineering lower long-end yields remains difficult while inflation is elevated, Fed policy expectations are moving hawkishly, and budget deficits remain historically large.
“Another catalyst is likely needed to move longer-end yields lower,” wrote Angelo Manolatos and Francis Brown, strategists at Wells Fargo. “These could include a slowdown in growth and inflation, lower energy prices, less uncertainty around Fed policy, fiscal consolidation or a slowdown.” Friday’s Consumer Price Index report did not provide that catalyst: Headline CPI rose by 0.4% month over month (Figure 2) and by 3.4% year over year in August, while core CPI rose 0.3% month over month and 2.4% year over year.
Meanwhile, Fed Chairman Kevin Warsh has been reluctant to pre-commit to the central bank’s next move. But in a speech last month, he said the Fed would “have work to do” if it could not “be confident that underlying inflation is moving to our objective, clearly and at sufficient speed.” The August inflation data fit more comfortably in the camp of inflation not declining quickly enough. Futures markets responded by pricing a 25-bps rate hike next week as a high-probability outcome, with market-implied odds rising sharply after the CPI release.
In short, the macro narrative will ultimately drive the path of interest rates. Auctions are useful short-term gauges of supply and demand, but they’re not strong enough to dictate a structural trend by themselves. Inflation remains the heavyweight indicator, growth is still positive, labor remains sufficiently resilient, and fiscal supply concerns remain unresolved.
A lower-rate environment likely requires one of those macro pillars to break clearly to the downside. Until then, as John Michael Montgomery urged, sometimes you just “go ahead and make a bid.”
FROM THE DESK
Agency CMBS — Rates sold off for most of the week, leaving rate locks on the quieter side. Ginnie Mae spreads ended the week marginally tighter, while DUS was largely unchanged.
Municipals — Municipal bond market conditions weakened this week, as AAA tax-exempt yields moved significantly higher across much of the curve. Investors continued to digest an elevated volume of new issuance, while Treasury yields advanced amid renewed inflation concerns. Issuers have increasingly rushed to market to lock in financing before potential further rate increases, contributing to supply pressures. Although municipal bond funds recorded about $193 million of net inflows, high-yield funds posted $166 million of outflows and demand moderated for a second consecutive week. With supply remaining elevated and fund flows softening, the municipal market may experience continued volatility in the near term until a stronger balance between supply and demand emerges.
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
