Treasury Auctions Becoming Liquidity Grabs Amid Bond Rout

Updated on

Foreign central banks to mutual funds are increasingly turning to U.S. Treasury auctions to avoid the volatility accompanying the rout in global debt markets.

Bidding from the group known as indirects surged at Wednesday’s $24 billion 10-year note sale to the highest level since December 2011, even as prices of outstanding securities were whipsawed. Demand at Tuesday’s three-year note sale was the highest since December 2009.

“The auction process becomes a liquidity grab,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “They’re in, they’re done. You don’t see follow-through afterward, and the street doesn’t have any big need, so the market just goes back to what it was doing before the auction, which was trading off.”

Yields on benchmark 10-year notes have climbed by 42 basis points since April 17, around the time the global bond rout began, wiping out about $450 billion in market value. With 10-year yields higher than 18 of 25 developed countries, investors saw attractive levels, even amid concern sharp price swings will become more frequent. Buyers are betting that Treasuries will remain the most liquid bond market in the world.

“At these levels, the market offers excellent value,” said Jeff Caughron, chief operating officer in Oklahoma City at Baker Group LP, which advises community banks with more than $45 billion in investments. “The expected return on dollar-denominated assets versus alternatives continue to entice buyers of Treasuries and other U.S. assets.”

Dealer Forecast

The 10-year notes were sold Wednesday at a yield of 2.237 percent, compared with an average forecast of 2.268 percent in a survey of seven of the Federal Reserve’s 22 primary dealers. Last month’s sale of the notes yielded 1.925 percent.

Indirect bidders bought 60.2 percent of the notes. The average at the previous 10 sales was 50.9 percent. Indirect bidders purchased 52.7 percent of the three-year sale Tuesday. That auction produced a lower-than-forecast yield of 1 percent.

“The market has really become much less liquid,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of the primary dealers obligated to bid at the sales. “The auctions provide a way for a large account to purchase a large amount without having to go into the illiquidity of the secondary market.”

(An earlier version corrected the day of the 10-year note sale in the second paragraph.)

(Updates yields in the fourth paragraph.)
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