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Yields drop, curve flattens after bumper 30-year auction

  • Primary dealers, who are responsible for absorbing the supply not sold to direct and indirect bidders at auction.
  • The drop in longer-dated yields pulled the yield curve flatter with the spread between the two- and 10-year yields last down about 2 basis points to 76.6 basis points.
Published December 11, 2020
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NEW YORK: Strong demand for the $24 billion in 30-year US Treasury bonds on auction Thursday drove longer-dated yields lower and the yield curve flatter in afternoon trade.

Primary dealers, who are responsible for absorbing the supply not sold to direct and indirect bidders at auction, took home just 17.4% of the pool, roughly the result last hit in July. The 30-year yield fell to session lows after the auction and was last down 5.3 basis points to 1.636%. The benchmark 10-year yield fell 3.3 basis points on Thursday to 0.908%.

The drop in longer-dated yields pulled the yield curve flatter with the spread between the two- and 10-year yields last down about 2 basis points to 76.6 basis points. The spread between the five- and 30-year yields was last down about 3 basis points to 125.2.

"Yields this afternoon are being driven by the very strong auction, which stirred demand at the long end," said Gennadiy Goldberg, interest rates strategist at TD Securities, "as well as some headlines that suggests that passage of a bipartisan stimulus bill may be farther away that we initially expected."

A US Senate vote on a stopgap measure to keep the government running could slip to the Friday deadline, a leading Republican said, as a top Democrat suggested wrangling over a spending package and coronavirus aid could drag on through Christmas.

The move lower in longer-dated yields on Thursday was not expected to reverse the broader trend higher in 10- and 30-year yields. Since the lows hit in March, the 10-year yield has risen more than 60 basis points, and the 30-year has risen nearly 100. The two-year yield, by comparison hit an all-time low in May and has since risen about 4 basis points.

Both rates have increased enough in the past several months that some analysts believe the Fed will purchase more longer-dated debt to cap yields and keep borrowing costs low. Since March the Fed has bought more than $2 trillion worth of Treasury debt, most of it in shorter-dated notes.

The Fed's policymaking committee is scheduled to meet next week.

"The Fed is clearly out there wanting to keep expectations on rates low and that they will continue to broaden their balance sheet significantly," said Stan Shipley, macro research analyst at Evercore ISI.

Goldberg also argued the Fed was likely to reweight their Treasury purchases next week.

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