Justin Lederer Comments: T-Bonds Fall After Auction Attracts Lukewarm Demand
August 9, 2012, Investor's Business Daily
Treasury debt prices fell Wednesday, and yields hit their highest in over a month after an auction of $24 billion of 10-year notes drew only lukewarm demand.
But lingering safe-haven demand due to caution over the eurozone debt crisis helped contain losses.
The Treasury's sale of 10-year notes had a bid-to-cover ratio — a measure of demand — that was the lowest since August 2009, and the high yield in the auction topped expectations, indicating investors were reluctant to buy the debt at open-market prices.
The auction brought a high yield of 1.68%, above the record low of 1.46% in a 10-year note sale in July.
"Weak stats across the board for the 10-year auction ... bear a sharp contrast to last month's monster 10-year auction," said George Goncalves, head of U.S. interest rates strategy at Nomura Securities International in New York.
"We attribute the weak demand to investors looking to lock in a higher coupon, as well as an element of a buyers' strike taking place more so than a short base starting to form in earnest in the market," Goncalves said.
Treasury prices fell Wednesday afternoon, with 10-year notes trading 07/32 lower to yield 1.651%, up from 1.63% late Tuesday. Yields reached as high as 1.66%, the loftiest level since late June.
"The market has traded on the heavier side post-auction with redistribution of auction purchases," said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York.
The 10-year note sale was part of $72 billion of new supply this week, making up the Treasury's quarterly refunding needs. The Treasury sold $32 billion of three-year notes Tuesday and will sell $16 billion of 30-year bonds Thursday.
Separately, a strong auction of German debt Wednesday reinforced a rebound in the German Bund, as the euphoria following last week's European Central Bank meeting was dampened by the need for details on when and how any potential help may take place.
Ten-year Spanish government bond yields briefly touched the 7% danger level on the growing view that it may take time until Spain asks for a bailout, which would open the door for ECB intervention.
Although the ECB has outlined plans to buy sovereign debt alongside the eurozone's bailout funds, it will not happen before September and not unless either Spain or Italy first ask to access the funds, something that would involve submitting to strict supervision.
But Spain and Ireland dodged a bullet on Wednesday when ratings agency DBRS stopped short of downgrading their debt below a European Central Bank trigger for extra charges to banks using the countries' bonds as collateral.