U.S. Markets

Largest 10-year Treasury auction sold near historic low yields

NEW YORK (Reuters) - The U.S. Treasury Department on Wednesday sold a record $38 billion in 10-year government notes to strong demand near historically low yields.

Investors easily absorbed the additional supply, up $6 billion from the last record-sized auction in May. The coronavirus pandemic has driven the benchmark 10-year yield US10YT=RR to all-time lows, as demand for high-quality, safe-haven assets has dramatically narrowed the premium offered to investors for holding the debt.

“Demand at the 10-year this afternoon was strong, closing at the second-lowest yield in history with robust underlying statistics indicating solid buy-side interest at these valuations,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.

Despite the broader trend of falling rates, the benchmark yield going into the auction was at its highest in a month as investors sold off holdings in anticipation of a wave of supply.

Bond yields rise as prices fall.

The increased supply at auction was in part responsible for the fall in yields, said Andrew Brenner, head of international fixed income at NatAlliance. “That’s why you went from 50.8 basis points last Tuesday at the close to roughly 66 basis points today,” he said.

The sell-off was also strategic, Brenner said. “They cheapened up the auction, they got some of the longs to get kicked out on soft losses, and now they have it at a good place at which to buy it.”

Indirect bidders, a proxy for foreign buyers, took 65.43% of the supply, while direct bidders took 14.74%. Primary dealers, who are responsible for buying all remaining supply after the indirect and direct bids, took 19.83%, below the 12-month average of 26.1%.

The ratio of bids to the amount of debt on offer, a measure of overall demand, was 2.41, lower than July but roughly in line with the average.

Following the auction, the 10-year yield dropped, and last was roughly flat on the day at 0.661%.

Prices for gold XAU=, which becomes more attractive to income-seeking investors when yields fall, stabilized on Wednesday, up more than 1% on the day after notching their worst drop in seven years.

“As yields go up, there is more competition for gold and gold gets weaker. Since yields have stabilized since this morning, gold has a little bit of a bounce to it,” Brenner said.

Reporting by Kate Duguid; Editing by Leslie Adler