The U.S. Treasury's 30-year bond auction on Thursday drew solid demand even after yields hit 24-year highs. The result pulled the 30-year yield back from an intraday peak, though Vincent Ahn of SLW Investments says the auction's outcome still hinges on who shows up to buy, not just the price on offer.
A crucial test, and a pass
The U.S. Treasury's auction of 30-year bonds on Thursday was a crucial test for markets, coming as America's long-term borrowing costs climbed to their highest levels in 24 years. The auction passed. Its bid-to-cover ratio came in at 2.54 to 1, down from 2.61 to 1 at the previous 30-year sale but above the 2.41-to-1 average of the past five auctions.
Before the sale, jitters had returned as the 30-year Treasury yield climbed above 5.73%, a fresh 24-year high, as oil prices surged on worries the Iran war was on the verge of re-escalating. On Wednesday, a strong 10-year auction had briefly calmed the jittery tone around rising yields globally.
Why the 30-year yield matters
The 10-year Treasury yield is the benchmark most investors watch, since it helps set rates on consumer loans like mortgages. But according to Vincent Ahn, portfolio manager at SLW Investments: "the one maturity the Federal Reserve does not control". The 2-year yield reflects bets on the Fed's next moves on interest rates, while the 30-year yield can reflect the price of trusting a government with money for a generation, Ahn told MarketWatch.
That trust matters given uncertainty around inflation and an elevated U.S. deficit, as the government needs help financing its $40 trillion national debt. Six months ago, a sustained push above 5% for the 10-year yield and its 30-year counterpart was viewed as unlikely. Now, Bret Kenwell, U.S. investment analyst at eToro, wrote Thursday that investors are questioning whether the threshold has moved closer to 6%.
Yields pull back after the auction
On Thursday, the 30-year yield rose to an intraday high of 5.732%, the highest since June 2002 according to FactSet data, before paring gains to 5.661%. In afternoon trading, it had pulled back further to 5.61%.
Treasury bonds like the 30-year carry thinner liquidity than shorter-dated notes, and buyers tend to be pensions, insurers and some foreign accounts, Ahn said, since dealers often avoid them because their values can swing more when inflation concerns flare. Higher yields are already a stumbling block for parts of the stock market beyond tech, especially small-cap stocks that until recently had been outperforming this year. U.K. 30-year yields hit 6% last week before easing slightly, and the selloff in French bonds remains a focal point in global markets.
Source: MarketWatch
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