The first U.S. auction of a 20-year Treasury bond in 34 years was met with strong demand, showing the market is open to the government's plan to extend the average maturity of its debt.
The government sold $20 billion of the issue, priced to yield 1.22%. There were $50 billion in orders for the bond.
"The auction went very well. Demand was very robust. This shows that the Treasury made the right decision to bring a new 20-year to market rather than an ultra-long bond," said Jon Hill, senior fixed income strategist at BMO.
Treasury Secretary Steven Mnuchin said this week the U.S. plans to increase its issuance in the 10-year, 20-year and 30-year bonds to extend the length of time the U.S. has to pay off its debt. He said the Treasury considered ultra-long 50- and 100-year bonds but ruled them out based on a lack of demand.
The U.S. budget deficit is expected to swell to more than $3 trillion this year, as the government spends on stimulus to fight the impact of the coronavirus.
"In the beginning of the crisis, they issued over $1 trillion worth of bills, and now they want to term out that issuance, rather than borrow for a month or two at a time, borrow for a couple decades at a time," said Hill.
The new bond is expected to appeal to big investors looking for longer duration securities, like pensions and insurance companies.
The yield is about 50 basis points above the benchmark 10-year yield. The 10-year fell to 0.68% after the auction. The 30-year bond yield fell to 1.39% from 1.42% before the auction. Yields move opposite price.
Hill said the security was well-priced going into auction. Dealers took 24.6% of the issue, while direct bidders, which include insurance companies and big U.S. investors, received 14.7%. Indirect bidders, which include foreign entities, took 64%.
The new bond should be attractive to foreign investors who find U.S. Treasurys to be a better-yielding alternative to their own sovereign debt, much of which has negative yields.
The 20-year was yielding about 1.218% just before the 1 p.m. ET auction.
The Treasury first announced its plans for a 20-year bond at the beginning of the year, when the deficit was expected to run at about $1 trillion. Wells Fargo now expects the federal deficit to total $3.4 trillion for fiscal year 2020, and $2 trillion in 2021.