What's the big deal ? It's just another bond auction ....

ref :- "Bond market drama builds around auction that could bring highest yield in 7 years" , CNBC Markets

Generally speaking, few things could be more routine than the regular auctions of bills, notes and bonds (IOUs, in other words) conducted by Treasury departments in the US and around the globe. Nothing is more normal than governments borrowing from the markets to finance their obligations, even if the amount of new paper issued varies widely with the condition of government finances.

But investors should be keeping a close eye on how today's auction of $26 bln of benchmark 10yr US Treasury Notes fares. For one thing, the size of the issue is a record and is part of this week's funding programme that saw $30 bln of short-dated T. Bills sold off yesterday , with $18 bln of 30yr T.Bonds to follow tomorrow.

At yesterday's T.Bill auction demand was a touch on the soft side, and yields on the all-important 10yr Treasury crept up a few points to 2.97% in advance of today's sale. Nothing overly dramatic about that, except that once again we're knocking on the door of the "crucial" 3.00% level. As we've been discussing quite a bit, some may well wonder just how significant a barrier 3.00% truly is, given that the yield has poked its head above it several times only to fall back again.

They may have a point, but the context within which today's sale takes place undoubtedly increases its importance. Historically, strong growth, on-target inflation and low unemployment would be expected to point to higher yields on 10yr Treasuries than 3.00%, and when you add to that the huge supply of new Treasury issues coming down the line to pay for the current administration's tax cuts and infrastructure spending, lower prices and higher yields would seem not only logical but highly likely. Ah yes, but that would of course fail to take into account some factors specific to today's condition : low productivity, and the failure of generally high levels of employment to spill over into any noteworthy wage rises ; a yield of near 3.00% on the US 10yr may not sound great but it's still a lot better than foreign investors can get at home, even taking the cost of hedging foreign exchange exposure into account; and US Treasury paper is SAFE .... do not underestimate the attraction of a safe-haven in a very troubled world.

Last week's employment data was, in fact, a bit weaker than expected, which accounts for the 10yr yield falling back to 2.925 % earlier this week. For a balanced view, not too much should be read into one set of numbers (though the market inevitably does exactly that). There's very little evidence of the growth story slowing, and certainly not enough to stop yields having to rise to 3.00% and above to attract buyers should the auction go badly. That would be the first time in over 7 years that investors would be able to get that sort of return on new-issue 10yr Treasuries. Sure as eggs are eggs it will have some shouting that the way to much higher yields is open , citing falling demand for all the Treasury funding to come.

Well, that's still a leap .... there's absolutely no certainty that the auction will go poorly enough to see 3.00% yields, and even if it does there's no evidence that a break of 3.00% points to much higher yields (as we've seen). But it would open up the possibility, and that's why it will be closely watched.

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