The market seeks high yields, as the 30-year US Treasury bond auction once again falters, causing US bonds to fall, but US stocks hold steady
Analysis shows that the dismal auction of the 10-year US Treasury bonds yesterday led to a surge in bond yields and a sharp decline in US stocks. The last thing the market wants to see is another disastrous auction of the 30-year US Treasury bonds, but that is exactly what it just experienced. The US bonds fell as expected, but unlike yesterday, US stocks held onto their gains after the poor auction of the 30-year US Treasury bonds, and then further expanded their gains
On Thursday local time, the U.S. Department of the Treasury auctioned $25 billion in 30-year Treasury bonds. The results continued the trend of poor performance seen in yesterday's 10-year Treasury bond auction.
The winning yield for this 30-year Treasury bond auction was 4.314%, the lowest yield since January when it was 4.229%. The last winning yield on July 11th was 4.405%. The pre-issued yield for this auction was 4.283%, with a tail spread of 3.1 basis points, the largest since November last year.
The bid-to-cover ratio for this auction was 2.31, compared to 2.30 in July, which is below the six auction average of 2.406.
As a measure of domestic demand in the U.S., the allocation to Direct Bidders, including hedge funds, pension funds, mutual funds, insurance companies, banks, government entities, and individuals, was 15.5%, lower than the recent average of 18.4%.
As a measure of foreign demand, the allocation to Indirect Bidders, typically foreign central banks and institutions participating through primary dealers or brokers, was 65.3%, significantly higher than July's 60.8% but lower than the recent six auction average of 66.4%.
Primary dealers, acting as "dealers of last resort" to absorb any unsold supply, received an allocation of 19.2%, the highest since November last year, indicating insufficient real demand.
Following the latest auction results, the yield on the 30-year Treasury bond rose in the short term, reaching above 4.3% to set a new daily high.
Financial blog Zerohedge commented:
Yesterday's lackluster 10-year Treasury bond auction led to a surge in bond yields and a sharp drop in U.S. stocks. The last thing the market wanted to see was another disastrous 30-year Treasury bond auction, but that's exactly what it just experienced.
Overall, this was another lackluster auction, with yields plummeting significantly in recent days. This is why there are few buyers in the secondary market, as they are simply waiting for bond prices to retrace recent gains before entering.
However, unlike yesterday, U.S. stocks maintained their gains after the poor 30-year Treasury bond auction and further extended their gains. The S&P 500 index rose by 2.36%, the Dow Jones Industrial Average rose by 680 points or 1.77%, the Nasdaq Composite rose by 3%, the Nasdaq 100 index rose by 3.18%, and the Philadelphia Semiconductor Index surged by 6.8%