Treasury Auction: $39 Billion 10-Year Sale With Yields Above 5%

NEW YORK — The Treasury will sell $39 billion of 10-year notes on Wednesday afternoon, a Treasury auction that arrives with the 10-year yield above 5 percent, equities near record highs and the Federal Reserve due to publish the minutes of its September meeting. For a benchmark that has traded through 5 percent, demand at the sale will be read as a gauge of how much yield investors want for holding duration.

Key takeaways

• The offering is a reopening of the 10-year note: 9 years and 10 months remaining, a 4.625 percent coupon and an August 2036 maturity, with settlement on October 15.
• Recent 10-year sales cleared at 4.580 percent in July, 4.683 percent in August and 4.834 percent in September.
• ING strategists describe risk sentiment as improving, with implied rate volatility ticking lower, but doubt rates will settle calmly.
• The Fed releases its September FOMC minutes the same day.

What is on offer

According to TreasuryDirect, the sale is a reopening of the 10-year note first issued in August, which means bidders are buying additional supply of an existing security rather than a new coupon. Bids are submitted competitively by yield, while noncompetitive bidders accept the yield the auction sets.

The last three 10-year sales trace a steady climb in the price investors have demanded. The July reopening cleared at 4.580 percent with a bid-to-cover ratio of 2.59. The new 10-year in August cleared at 4.683 percent (2.53), and the September reopening cleared at 4.834 percent (2.71). The 10-year yield has since moved above 5 percent, at 5.27 percent on October 6 according to Treasury data, so attention will fall on how the clearing yield compares with September and on demand quality, measured by bid-to-cover and the share taken by indirect bidders.

The rates backdrop

ING’s rates strategist Michiel Tukker described sentiment as bifurcated in a Wednesday morning note, calling risk sentiment improved for now: the S&P 500 at new highs, Brent briefly below $100 a barrel and implied rate volatility ticking lower. Tukker nonetheless doubted that rates will settle calmly at current levels. Strong equities and relatively tight credit spreads point to easy financial conditions, he wrote, though households refinancing mortgages may feel differently. In Europe, he noted that French government bond spreads tightened by almost 10 basis points on a fiscal plan from Marine Le Pen, toward 125 basis points over Bunds, but he expects the spread to stay in a 125 to 150 basis point range.

Other supply this week

The US sale is one of several government auctions that day, alongside a new 7-year German Bund (4 billion euros) and UK 2-year and 5-year gilts totaling 2.5 billion pounds, according to ING. Competing supply abroad matters because global investors weigh Treasuries against other sovereign debt.

What to watch

Three numbers will frame the day: the high yield against recent auctions, the bid-to-cover ratio relative to the 2.71 of September, and the indirect bidder share. The Fed’s September minutes, due later, will show how officials weighed the rate outlook when they raised rates in September. On Thursday the Treasury follows with a 30-year bond sale, extending the test of long-end demand.