Treasury bond yields rose again on Monday following a weaker-than-expected auction of 2-year notes that lowered demand from foreign investors and a massive increase in borrowing costs for the US government.
The Treasury sold $43 billion of 2-year notes at a high auction yield of 4.29%, up nearly a pint of a percentage point from the previous auction in late August and another point. ahead of the current Fed Funds target rate of between 3% and 2.25%.
Investors bid $2.51 for every dollar of 10-year notes offered by the Treasury, auction data showed, a slightly firmer tally than the 2.51 ‘bid-to-cover’ ratio recorded at the last auction on August 23, when the yield was just 3.307%.
Prices and yields in the bond market are moving in opposite directions, making paper today much cheaper than it was in early August.
Overseas buyers, the data showed, took about 53% of the sale, down from 66.1% in August, suggesting overseas buyers are seeing attractive returns in other markets as global central banks signal further short-term rate hikes.
Direct bidders, who represent domestic demand, picked up the slack by removing 100% of their sell allocation, a tally that could indicate institutional fund managers are taking cash from equity markets, where the dividend yield on the S&P 500 is only 1.7. %, and put it to use in treasury bills.
Stocks extended their decline following the auction results, with the Dow Jones Industrial Average down 371 points on the session and the S&P 500 dropping 41 points.
Benchmark 10-year bonds rose 4 basis points to 3.896% following the auction, while 2-year bonds were pegged at 4.338%.
In fact, U.S. Treasury bond yields have risen more than 110 basis points since Aug. 1, Bank of America noted in its weekly “Flow Show” report on Friday, helping to put global bond markets on pace. their largest annual declines in more than seven decades. .
What BofA calls a “bond crash” could “threaten credit events and the liquidation of the world’s most crowded deals: long US dollar, long US tech and long private equity.”
“Real capitulation is when investors sell what they love and own,” BofA said.
Fixed income traders are also betting on another 75 basis point Fed rate hike in November, according to CME Group’s FedWatch, while the Atlanta Fed’s GDPNow forecasting tool suggests growth of the third quarter slowed to just 0.3%.