The 10-year US Treasury auction was strong, with overseas demand at the second highest level in history, and major Wall Street banks were almost shut out.
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On Wednesday local time, the U.S. Treasury auctioned $39 billion in 10-year Treasury bonds, with results indicating very strong demand.
The winning yield for this 10-year Treasury auction was 4.033%, a significant drop from the 4.255% at the previous auction on August 6, and the lowest since September last year. In September last year, the market also experienced a round of economic growth fears, after which the Federal Reserve initiated a 50-basis-point rate cut. The winning yield was 1.3 basis points lower than the pre-auction yield, the largest gap since April’s market turmoil, indicating strong demand.
The bid-to-cover ratio was also impressive, coming in at 2.65 this time—the highest since April. The previous ratio was 2.35, with the average of the last six auctions being 2.556.
The market paid the closest attention to the details of the auction:
The indirect bid ratio was 83.1%, the second highest in history, only behind 87.9% during the market panic/basis trade crash in April. Indirect bidders are typically foreign central banks and institutions bidding through primary dealers or brokers, and serve as an indicator of overseas demand.
The direct bid ratio was 12.66%, the lowest since April this year. Direct bidders include hedge funds, pension funds, mutual funds, insurance companies, banks, government agencies, and individuals, serving as an indicator of U.S. domestic demand.
As the "buyer of last resort" for all unsold supply, primary dealers were allocated only 4.2% this time, a new historical low, highlighting actual robust demand.
Financial blog Zerohedge commented:
Following yesterday’s exceptionally strong 3-year U.S. Treasury auction, this was another stellar auction, pushing the 10-year Treasury yield down from its intraday high of 4.10% to a low of 4.03%. This move was also expected, as the day’s PPI data came in well below expectations.
The next question is whether Thursday’s CPI will confirm the downward trend in inflation, which could lead the Fed to slash rates by 50 basis points at next week’s meeting.
Bloomberg commented:
Wall Street’s big banks were almost shut out of the U.S. Treasury’s 10-year bond auction on September 10.
There are currently 25 primary dealers, and in this $39 billion auction they were awarded a record-low 4.2%. Primary dealers are designated by the Federal Reserve and are expected to participate in all Treasury auctions. This is the lowest amount won by primary dealers in a 10-year bond auction since the U.S. Treasury began releasing bidding participation data in 2003.
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