Highest Bond Yield at Auction in a Year Could Be Sign of Things to Come
The Treasury auctioned $13 billion 30-year bonds at the highest auction yield in a year, in a sign that traders say foreshadows an eventual end to a long period of extremely low interest rates.
"I think over time, stronger data will have an impact on yields, and we'll see higher yields," said Brian Edmonds, head of interest rate trading at Cantor Fitzgerald. He doesn't expect rates to jump dramatically soon, however.
The bonds were auctioned with a 3.248 percent yield, the highest level in an auction since April, 2012, and above the 1 p.m. level of 3.23 percent. The auction was weak with a bid to cover of 2.43, below the average of the last four of 2.61 percent.
"It does tell us we're going to have to keep a very close watch on rates," said Art Cashin, director of floor operations at UBS. "Everybody's talking about about the Fed might step away. Well, I don't think that's the case."
Direct bidders, who deal directly with the Treasury took a surprising low 4.9 percent, about a third of the average and the lowest level since August, 2010. The indirect bidders took 42 percent, above the normal 34 percent.
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"The aftermath of the auction is fine. It wasn't any kind of disaster. The market came back. It did take us a couple of basis points to underwrite the auction," said said Edmonds. He said while indirect bidders were light, dealers took the usual amount.
"It was partially strong data and I think everyone is nervous about the long end...There's a lot more demand for customers in the the 10 year sector than the 30 year sector," Edmonds said. Technically, the bond was a reopened 30-year with a duration of 29-years, 11 months.
Traders said while the auction yield is in line with the market, it is a sign of things to come. February's surprisingly strong nonfarm payrolls of 236,000; Wednesday's jump in retail sales and a surprise drop in jobless claims are among the data contributing to weaker bond prices, which move inversely to yields.
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