Treasury Auction Sees Strong Demand at 4.438% Despite Inflation Risks

Key Takeaway

• The $39 billion 10-year Treasury auction saw strong demand, awarded at 4.438%, indicating investor appetite despite upcoming inflation data and Fed communications.
• Investors captured nearly three-quarters of the sale, the highest since February 2023, reflecting confidence in higher yields.
• Shorter-dated Treasury yields declined less as inflation data continues to challenge expectations for Fed rate cuts this year.

Strong Demand for 10-Year Treasury Auction

The U.S. Treasury market experienced a notable rally as the $39 billion 10-year note auction drew exceptionally strong demand. The auction was awarded at a yield of 4.438%, slightly lower than the pre-auction trading yield of 4.458%, indicating excess demand. Investors captured nearly three-quarters of the sale, the highest participation rate for a 10-year auction since February 2023. Despite the auction yield being lower than last month’s, it remains among the highest in the past decade. John Madziyire, senior portfolio manager at Vanguard Group Inc., noted, “Clearly there is demand” driven by higher yields. However, he cautioned that the bond market could be volatile due to upcoming inflation data and Federal Reserve communications.

Market Reaction to Economic Data

Yields in the 10-year sector had climbed from under 4.30% over the past week, influenced by strong economic data, including the May jobs report. JPMorgan Chase & Co.’s Treasury client survey for the week ending June 10 found the lowest level of optimism in two months. Shorter-dated Treasury yields declined less, as persistent inflation data threatens to erode confidence in Fed interest-rate cuts this year. The growth rate of consumer prices continues to exceed the Fed’s 2% target, with little evidence that current interest rates are constraining the economy.

Fed Meeting and Projections

The Federal Reserve meeting later on Wednesday will include policymakers’ latest quarterly economic and interest-rate projections. As of March, the median forecast was for three quarter-point cuts in 2024. However, expectations implied by swap contracts have since declined, pricing in just 36 basis points of easing by December and an 80% chance of a quarter-point cut in November. The bond market is also experiencing a pre-FOMC “drift,” a phenomenon where yields tend to fall on Tuesday and Wednesday during a Fed meeting week. This drift, combined with a flight-to-quality bid amid political uncertainty, has helped maintain the bond bid despite the 10-year supply.

Street Views

• John Madziyire, Vanguard Group Inc. (Cautiously Optimistic on the bond market):

  "Clearly there is demand aided by higher yields... you could easily see the bond market get whipsawed by those events."