The culprit behind the sharp drop in US stocks and US Treasury bonds on Thursday: Rarely bleak demand for 30-year Treasury bonds!
The auction of 30-year US Treasury bonds on Thursday saw the highest bid rate since 2007. The tail rate was the largest in over two years and the third largest on record, reflecting exceptionally weak demand. Primary dealers, who were able to avoid a failed auction, received the highest allocation ratio in 22 months. Following the announcement of the auction results, the yield on 10-year US Treasury bonds rebounded nearly 20 basis points from the daily low during trading.
In addition to the unexpectedly accelerated growth of CPI inflation, the sharp drop in US stocks and US bonds on Thursday also had a "culprit" - the sale of 30-year US Treasury bonds.
The US Treasury Department announced on Thursday, October 12, that it had completed a $20 billion sale of 30-year US Treasury bonds, with a bid rate of 4.837%, nearly 50 basis points higher than the previous high. The bid rate for the same period of US bonds sold last month was 4.345%.
The bid rate for this 30-year US bond sale is the highest since August 2007, and it is 3.7 basis points higher than the pre-issuance rate of 4.800%. This is the fourth consecutive sale where the bid rate is higher than the pre-issuance rate, and it is the largest since November 2021, making it the third largest tail in history.
The largest tail in over two years reflects the particularly weak demand for this sale, because the larger the tail, the lower the price that the Treasury Department is forced to sell to bidders.
The bidding situation and distribution of winning bids for this sale also reflect the low demand. The bid-to-cover ratio for this tender was 2.349 times, a new low since February, far below the average of 2.44 times for the last six sales.
The results of the sale show that indirect buyers, including overseas central banks and other official institutions as well as private investors, were allocated 65.125%, lower than last month's 64.487%. Direct buyers, including the Federal Reserve and other US federal government entities, were allocated 16.7%, a new low since January.
Primary dealers who absorbed the unsold portion of the bonds and avoided a failed auction were allocated 18.2%, a new high since December 2021.
Financial blog Zerohedge commented that it is almost time for the Fed's QE. It pointed out that the last time brokers saw so many unwanted duration "rewards" was in 2019, when the Fed announced the start of balance sheet expansion and began purchasing $60 billion in short-term bonds per month, although the Fed chairman denied it was QE at the time. Therefore, it believes that we should pay attention to whether there will be a "credit event" in the next few days.
After the announcement of the results of the 30-year US bond yield sale during the midday trading session of US stocks, the decline in US Treasury prices accelerated and yields continued to rise.
The benchmark 10-year US Treasury yield, known as the "anchor of global asset pricing," briefly tested 4.73%, hitting a daily high and rebounding nearly 20 basis points from the low point since September 29, when the US CPI was announced, completely reversing the downward trend of more than 10 basis points in the previous two trading days.
The secondary market yield of the 30-year US bond once approached 4.89%, rising more than 20 basis points from the low point since September 29 before the European stock market opened on Thursday. As the US bond yields rise, the decline in US stocks widens. The previously rebounding S&P and Nasdaq turned downward, with both falling more than 1%. The Dow Jones Industrial Average fell nearly 350 points at one point, with a decline slightly exceeding 1%.