Weak Demand in Treasury Note Auction

The recent auction of 10-year Treasury notes did not attract significant interest from investors. With a yield of 4.519%, slightly higher than the pre-auction trading yield of 4.511%, the auction resulted in a small tail of 0.8 basis points. This indicates that the government had to offer a premium over the market to entice buyers, suggesting less-than-robust demand.

However, it is worth noting that the tail observed in this auction was much smaller than the one seen in October. While demand may be soft, it still exists. BMO Capital Markets' Ian Lyngen suggests that there is demand, but marginal participants in the auction require at least a modest incentive to invest.

The bid-to-cover ratio, which compares the dollar value of investor bids to the dollar value of debt offered, came in at 2.45 times. Although this matches the ratio from May's auction, it is slightly lower than the ratio of 2.56 times seen in August and the average of 2.49 times.

Foreign bidders, including central banks and private investors outside the U.S., accounted for 69.7% of the debt purchased, which is consistent with the average of 70.2%.

This $40 billion auction was closely watched by bond investors, as concerns about cracks in demand for Treasuries arose after October's auction resulted in a significant tail—the largest in six months. The weakening demand comes at a time when the national deficit has grown to $1.7 trillion in fiscal 2023, up from $1.4 trillion the previous year. Rising government spending has led to increased debt, causing concern among investors about finding buyers for all this debt.

Following the auction, yields on the 10-year Treasury notes dropped to 4.511% from 4.527% before. Typically, weak demand leads to higher yields, while strong demand has the opposite effect.