It wasn’t long ago that the Treasury refunding announcements were treated like an afterthought by everyone except the biggest financial-market junkies. Those days are long gone. Now, they have the potential to move stocks and bonds.
That was certainly the case on Wednesday, when the U.S. Treasury decided to moderate sales of its longer-dated debt, a move that helped push bond yields down significantly and provided support for stocks. Reduced yields prop up the value of bonds already in investors’ portfolios.
The department on Wednesday said it would sell $112 billion in long- and medium-term securities in its coming auctions. It increased the amount of bonds and notes on offer, but dialed back the increase in 10-year and 30-year auctions compared with the amount laid out in August. Sizes for both coupons were $1 billion lower than what had been announced in August.
In the past, Treasury refunding announcements would go unnoticed by markets. That changed in the third quarter when it announced larger than expected borrowing to meet all obligations. It sent the 10-year and 30-year yields higher, forcing Americans to pay more for their mortgages, credit card balances, and bank loans
Yields have been rising since then, with those on the 10-year note and the 30-year bond hitting their highest level since 2007 in October, causing the value of bonds and notes to fall sharply. The
iShares 20+ Year Treasury Bond exchange-traded fund
(ticker: TLT) has fallen 14% so far this year.
Now, reduced supply on the long-end is causing the opposite. Yields fell Wednesday after Treasury officials cited the historic rise in yields, and the “term premium,” the extra compensation demanded to hold longer-dated bonds, as reasons for being less aggressive with issuance. Officials also noted possible “early evidence of waning demand” as demonstrated by the weak reception at the 30-year auction this month.
Fewer bonds available in the market suppresses yields because investors may compete to buy those bonds.
Treasury expects one more quarter of larger auctions, although “we suspect the risk is tilted toward a more measured approach going forward,” wrote Ben Jeffery, an interest rate strategist at BMO Capital Markets.
The Treasury has historically followed a principle of being “regular and predictable” and opting for a repeat in increase for most debt also seems to reflect its desire to maintain consistency.
With respect to Treasury bills, or debt maturing in under a year, the Treasury said it “expects to maintain bill auction sizes at current levels into late-November.”
The T-bill share of the market is already elevated; in September, it was 20.4% of the market, according to Deutsche Bank, higher than the recommended range of 15% to 20%. Officials said the amount is expected to deviate from that range for a significant period.
After the announcement, the yield on the 10-year Treasury, which hit a 16-year high of 4.987% on Oct. 19, has fallen 0.141 point to 4.814%. The 30-year bond was also down, 0.045 point, to 4.979% after closing at 5.024% on Tuesday.
The equity markets were largely higher: The
S&P 500
has gained 0.3%, while the tech-heavy
Nasdaq Composite
has risen 0.6%, and the
Dow Jones Industrial Average
has advanced 0.10%.
The reaction makes sense. In recent months, stock prices and bond yields have typically moved in opposite directions. With news of lower-than-predicted supply on the long end, yields get suppressed while equities or risky assets charge ahead.
Let’s see if it lasts.
Write to Karishma Vanjani at [email protected].
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