U.S. Treasury yields fell Wednesday after the Treasury launched its first sale of the 20-year bond since 1986, drawing better-than-expected appetite for the new issuance.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, 0.680% fell 3.2 basis points to 0.679%, while the two-year note rate TMUBMUSD02Y, 0.173% was down a basis point to 0.161%. The 30-year bond yield TMUBMUSD30Y, 1.401% slipped 3.3 basis points to 1.400%.
What’s driving Treasurys?
As part of the Treasury Department’s strategy to finance its multi-trillion-dollar deficits this year, it sold $20 billion of 20-year bonds in the afternoon.
The auction “tailed” by 0.7 basis points, usually seen as a sign of a poor demand. The tail is the gap between the highest yield the Treasury sold in the auction and the yield before the auction began.
Investors said, however, the results were better than expectations as it was unclear how much demand there was for bonds between the 10-year and 30-year maturity among insurance companies, pension funds and other institutional investors that need to match long-dated liabilities with equally long-dated assets.
Market participants also point out the 20-year bond could help improve liquidity for older long-term Treasurys, a lingering issue since mid-March, when trading for these so-called off-the-run securities halted altogether.
In other markets, the U.K. held its first bond sale that achieved a negative yield on Wednesday. According to the Debt Management Office, it auctioned £3.75 billion ($4.60 billion) of three-year bonds at an average rate of -0.003%.
The release of the Federal Reserve’s minutes from the April meeting of its rate-setting committee showed senior Fed officials did not think negative interest rates were an option, but discussions touched on the possibility of capping bond yields.
Boston Fed President Eric Rosengren said in an interview with MarketWatch that the central bank could do little to combat the public health crisis devastating the U.S.
What did market participants say?
“The expectation was it would be hard for investors to digest the 20-year bond. It doesn’t have a natural buyer and the size of the issuance was much larger than expected. For all these reasons, it wasn’t going to do well today,” said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management, in an interview.
“Since expectations were fairly low for this issue, people were fairly happy with the auction,” Ren said.
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