U.S. Markets

Bumper U.S. debt issue draws lukewarm demand

NEW YORK (Reuters) - The U.S. Treasury Department’s biggest auction ever of 30-year bonds met weak demand on Thursday, as the market struggled to absorb debt aimed at supporting an economy hit by the coronavirus pandemic.

The $26 billion offering was $4 billion larger than the next biggest, the last auction of new 30-year bonds in May. The bid-to-cover ratio, a measure of overall demand, at 2.14 was the lowest since July 2019.

“Demand is not really scaling up with supply,” said Tom Simons, money market economist at Jefferies.

The 30-year bond yield US30YT=RR rose to the highest level in a month in the morning as traders anticipated the additional supply. The yield continued to gain after the new debt sold at a high yield of 1.406%, the second-highest rate offered at auction since the beginning of the pandemic, Treasury data showed.

With bond yields so low, investors have largely gravitated to stocks for the prospect of superior returns and that has helped lift the S&P 500 .SPX back to near its record high from just before the crisis.

“Anything that triggers a surge in U.S. bond yields also threatens the bullish equity conjuncture,” wrote Societe Generale’s Albert Edwards in a research note on Thursday, who also pointed to fears of higher inflation as a risk to bond yields - and equities.

A key yield spread that acts as a U.S. bond market gauge of investor inflation expectations USBEI5Y=RR rose to a six-month high on Thursday, according to Refinitiv data.

The Treasury last week increased auction sizes across the curve and said that it planned to continue to shift more of its funding to longer-dated debt. Earlier in the week, record-sized auctions of new 10-year notes were sold to strong demand and $25 billion of 20-year bonds will be auctioned next week.

Indirect bidders, a proxy for foreign buyers, took 59.83% of the supply on Thursday, which Simons said was the weakest since November. Direct bidders took 11.87%. Primary dealers, who are responsible for buying all remaining supply, took 28.3%, higher than May’s 21.4%.

“This is the first time we’ve seen the increased issuance become a factor,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald, who said the weak direct and indirect percentages - despite record dollar amounts purchased - was evidence that demand was not catching up with supply.

Reporting by Kate Duguid; Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Megan Davies and Cynthia Osterman