(Bloomberg) — Treasury yields experienced a significant surge on Wednesday due to the poor demand for a sale of five-year notes. This has heightened concerns about the expected increase in auction sizes, which are anticipated to be announced next week.
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The offering of $52 billion in five-year notes yielded 4.899%, nearly 2 basis points higher than its trading price moments before the 1 p.m. New York time bidding deadline. This indicates that the demand from dealers fell short of expectations. Additionally, bidder-participation metrics were also weak, resulting in dealers being awarded their largest proportion of the tenor in over a year due to the downturn in investor demand.
Prior to the auction, yields were already rising, driven by stronger-than-expected new home sales data for September.
The increase in yields was particularly pronounced for long-maturity bonds, with the 30-year bond experiencing a climb of more than 15 basis points, reaching nearly 5.10% at one point. This marks a continuation of the selloff that pushed the 30-year yield to almost 5.18% on Monday, the highest level since 2007, before reversing and closing below 5%.
In recent weeks, Treasury yields have been propelled higher by expectations that the Federal Reserve will maintain its policy rate at an elevated level for a longer period than previously anticipated. Additionally, the supply of notes and bonds has also contributed to the upward trend. Auction sizes increased in August for the first time in over two years, and further increases are expected to be announced in the next quarterly announcement on November 1.
The current auction cycle concludes on Thursday with a seven-year note sale offering $38 billion. This will be the final Treasury coupon sale until November 7, potentially providing some stabilization to the market.
Wall Street banks have been gradually revealing their forecasts for the auction sizes that will be announced on November 1. Many major bond dealers have predicted a repeat of the changes made in August, such as a $3 billion increase in each monthly 10-year note auction compared to the previous quarter.
Other dealers, including Barclays Plc, Goldman Sachs Group Inc., and Morgan Stanley, have forecasted that the increases in 10- and 30-year auctions will be smaller than the previous adjustments.
(Adds supply calendar and outlook in last three paragraphs, updates yield levels)
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