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Harbinger of Higher Yields? 10-Year Treasury Auction Demand Lowest in over a Decade

May 09, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
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  • The US Treasury observed the weakest demand in a decade for its benchmark 10-year note at the most recent quarterly refunding saleechoing comments made just days earlier by JPMorgan Chase & Co. CEO Jamie Dimon and possibly exposing the safe-haven fixed income security to price volatility as a result of changes in inflation.  

 

  • Bids for the 10-year US Treasury note, which were valued at a total of $27 billion on Wednesday, exceeded the offering by just 2.17 times, the lowest since 2009. Although there is no concern for funding the US government, the drop in demand for US treasuries could require a higher yield, given how close the 10-year is to the 3-month yield right now
     
  • The depressed demand for US Treasuries follows comments made just hours earlier by JPMorgan Chase & Co. CEO Jamie Dimon that US Treasury yields were, “extraordinarily low,”. Dimon followed up by explaining that large-scale asset purchases by central banks across the world, “had to have an effect on the 10-year.”  
     
  • Two major factors are driving the lower demand for US Treasuries. First, you have foreign investors that are seeking to lower their exposure to US Treasuries; second, you have the US Federal Reserve much less active in the market with quantitative easing as compared to a few years ago.  

 

us-treasuries-chart

 

 

  • As can be seen in the chart above, the percent of US Treasuries held by foreign investors has steadily fallen over the last 5 years. From a 5-year high of 43.34% of US Treasuries held by foreign investors at the end of 2Q2014, foreign investors now hold just 34.87% of US Treasuries as of the end of 2018. According to Bloomberg, China and Japan are leading the charge in trimming US Treasury holdings.  
     
  • The US Federal Reserve is also aiding the cooling of demand for US Treasuries as the central bank slows down its robust quantitative easing policy enacted to boost US Treasury yields following the Great Recession.  
     
  • The cooled demand for US Treasuries led the notes offered on Wednesday to carry a coupon of 2.375%, the lowest in a year. The yield, however, for Wednesday US 10-Year Treasury notes, was 2.479%, above the prevailing level that existed moments prior to the deadline.

 

 
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