US Treasury's US$42 billion 10-year subscription hit one year low

The U.S. Treasury's US$42 billion (HK$327.6 billion) sale of new 10-year notes on Wednesday was poorly subscribed, with primary dealers taking in 16.2 percent of the total supply, the largest takedown in a year.

High dealer participation in Treasury auctions suggests lack of interest from other investors so that dealers had to step in to absorb the note. 

The auction priced at a high yield of 4.255 percent, roughly one basis point (bp) higher than the market's forecast in when-issued trading at the bid deadline. In bond market lingo, the 10-year note auction "tailed". This outcome meant market participants demanded a premium to purchase the note.

Benchmark 10-year Treasuries sold off following the auction, pushing their yields higher to 4.241 percent, up 4.5 bps, immediately after the auction. It was last at 4.219 percent, up 2.4 bps.

The bid-to-cover ratio, another gauge of demand, was 2.35, the lowest since August 2024, when it hit 2.32.

Jan Nevruzi, U.S. rates strategist at TD Securities in New York, said he was not concerned about the soft demand for the 10-year note.

"The last five auctions were pretty good ... But some of today's outcome was also functional because we just didn't have that big of a concession heading into the auction," Nevruzi said. So-called "concession" referred to that process in which market participants sell the note ahead of an auction so they can buy them back at a cheaper price.

Nevruzi meant that 10-year Treasuries were not sold off enough.

"There's also really not much data or anything to move markets. And we did have a little bit of volatility early in the day, you know ... So that might have also caused some natural pullback."

Other metrics showed weak demand, as well.

Indirect bids, which include foreign investors, took 64.2 percent, the lowest since January. That was lower than the six-auction average of 72.3 percent.

Direct bidders, who submit bids on their own and not on behalf of clients, took just 16.2 percent of supply, the lowest since April. Examples of direct bidders include large asset managers and insurance companies.

End-user demand, which combines both direct and indirect bids dropped to 83.8 percent from July's 89.1 percent and a six-week auction average of 88.8 percent. The end-user number was the weakest since April 2024.

"It appears last week's plunge in yields made the record-sized issue too expensive for its own good," said Kim Rupert, managing director for fixed income analysis, at Action Economics in San Francisco.

The US$42 billion auction size remains a record since February 2024.

The disappointing 10-year note sale followed an equally lackluster U.S. three-year note auction on Tuesday. The sale tailed nearly 1 bp, pricing at 3.669 percent.

Indirect demand was the lowest in two years, with primary dealers taking in 17.9 percent, higher than 16.5 percent from the last auction and the 15.6 percent average.

REUTERS