US Treasury sell-off intensifies! Auction of 7-year Treasury bonds met with lukewarm reception; Treasury repurchase operations again fell below the upper limit; municipal bond yields hit a 15-year high.

The U.S. Treasury market continued to be under pressure this week. Following a weak performance at the 5-year Treasury auction, Thursday's Treasury auction of $44 billion in 7-year notes also saw poor demand, with the winning yield rising to 5.085%, the highest level ever recorded for that maturity.

The winning bid yield in this auction was 0.7 basis points higher than the "spot issuance" yield, and the allocation ratio for overseas investors fell to 57.2%, the lowest since November 2025. Following the announcement of the auction results, the secondary market for US Treasuries continued to weaken, with the 10-year Treasury yield rising above 5.2%, the first time since 2007.

Meanwhile, the Treasury's second expanded bond repurchase operation on Thursday also failed to reach the maximum size of $6 billion, accepting only $4.078 billion in bids, equivalent to 68% of the upper limit , lower than the approximately 86% during the first expanded repurchase on September 11. Market liquidity support was weaker than market expectations.

The pressure in the fixed-income market has also spread to municipal bonds. The yield on the benchmark 30-year municipal bond rose to 5.07%, and the yield on the 10-year municipal bond rose to 4.01%, both reaching new highs since 2011.

U.S. Treasuries were sold off on Thursday, with the yield on the 30-year Treasury note rising as much as 9 basis points to 5.49%, the highest level since 2004.

Strategists at JPMorgan Chase and KKR believe that U.S. Treasury yields still have room to rise further as energy-driven inflation, massive government borrowing, and the risk of further tightening of monetary policy by central banks continue to escalate .

The auction of 7-year US Treasury bonds was met with a lukewarm reception, with yields hitting a record high.

The U.S. Treasury issued $44 billion in 7-year notes on Thursday, with the final yield at 5.085%, up from 4.512% a month earlier and the highest level ever recorded for this maturity.

The yield in this auction was 0.7 basis points higher than the "spot issuance" yield of 5.078%, with the largest tail since March of this year. The widening tail indicates that the final transaction yield was higher than the pre-auction market level, showing that investors demanded a higher yield to take on these government bonds.

Demand within the auction also weakened. The allocation to overseas investors fell to 57.2% from 60.8% previously, the lowest level since November 2025; the allocation to direct bidders rose to 30.3%, a historically high level. Primary dealers ultimately absorbed 12.5% of the issuance, roughly in line with recent averages.

While the auction's performance was less weak than the previous day's 5-year Treasury auction, it still failed to improve secondary market sentiment. Following the auction, the 10-year Treasury yield approached its intraday high again, currently hovering around 5.15%.

The Ministry of Finance's expanded share repurchase program has not yet reached its full target, with the actual amount only reaching 68% of the maximum limit.

On Thursday, the Treasury also conducted a second expanded "liquidity support" repurchase operation, targeting 20- to 30-year nominal coupon Treasury bonds, with a maximum repurchase size of $6 billion.

The operation received bids totaling $10.489 billion, but the Treasury Department ultimately accepted only $4.078 billion, equivalent to 68% of the maximum repurchase amount, significantly lower than the approximately 86% execution rate when the repurchase was first expanded on September 11.

The Treasury Department accepted only 12 of the 35 eligible bonds this time. The two largest transactions were $1.5 billion in Treasury bonds maturing in February 2048 with a coupon rate of 3.000%, and $1.5 billion in Treasury bonds maturing in November 2051 with a coupon rate of 1.875%.

The yield on bonds maturing between 2047 and 2051 that accepted the offer was approximately 5.54% to 5.56%, which was about 40 to 45 basis points higher than the 10-year Treasury yield of 5.10% to 5.16% at the time.

The Ministry of Finance did not accept large-scale low-price offers that significantly deviated from the reasonable yield curve this time. The 12 bonds accepted were all close to fitting the yield curve, meaning the Ministry of Finance did not expand the repurchase scale by significantly increasing the repurchase price.

The repurchase size was below the $6 billion limit, which also means that the "liquidity support" provided by the Treasury was less than the market had previously expected.

The yield on 30-year municipal bonds broke through 5%, reaching a new high since 2011.

As the US Treasury market came under pressure, the US municipal bond market also saw a significant sell-off.

As of 3 p.m. New York time on Thursday, the benchmark 30-year municipal bond yield rose 11 basis points to 5.07%, breaking the 5% mark and reaching its highest level since at least 2011. The 10-year municipal bond yield rose 14 basis points to 4.01%, also reaching its highest level since at least 2011.

Inflation concerns and market expectations of further interest rate hikes by the Federal Reserve are impacting the municipal bond market. As of Wednesday, municipal bonds had fallen by 2.8% in September, on track for their worst monthly performance since 2023.

According to data compiled by Bloomberg, the amount of municipal bonds offered for sale by investment management firms rose to approximately $3.4 billion on Wednesday, the highest level since the sharp market volatility at the beginning of the 2020 pandemic.

A team led by JPMorgan strategist Peter DeGroot stated that the municipal bond market is showing signs of negative feedback, with poor market performance leading to capital outflows, which in turn further drag down market performance. This situation is likely to persist until the interest rate environment stabilizes.

The high yields of municipal bonds are beginning to attract some institutional funds.

However, after the yield on municipal bonds rose above 5%, it also began to attract some institutional investors.

Mark Paris, chief investment officer in charge of municipal bonds at Invesco, said that market participants have reported that some insurance companies, banks and other cross-industry investors are entering the market, and "the 5% threshold is very important to them."

Meanwhile, the supply of municipal bonds may slow down in the future. As of Thursday, approximately $15.9 billion in municipal bonds are expected to enter the market for pricing over the next 30 days.

Ryan Ciavarelli, senior vice president at Belle Haven Investments, said that underwriters are more cautious about pushing new bonds to market when order books are underperforming, which could lead some issuers to postpone their offerings.

He stated that as long as the pricing of newly issued bonds remains attractive, there will still be demand in the market, but some issuers may choose to postpone issuance to observe market trends.

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