The US treasury sells $13 billion of 20 year bonds at a high yield of 4.798%

The U.S. Treasury sold $13 billion of 20 year bonds at a high yield of

• WI level at the time of the auction 4.799%
• Tail -0.1 bps vs 6 month average of -0.5 bps
• Bid to cover 2.67X vs 6 month average of 2.65X
• Dealers 12.57 vs 6 month average of 11.0%
• Directs 22.24% vs 6 month average of 25.3%
• Indirects 65.19% vs 6 month average of 63.7%

AUCTION GRADE: Given the results compared to the 6-month average, I give the auction an average grade of C. Not good. Not bad. Just average.

The 20-year Treasury bond occupies a unique and somewhat awkward position on the US yield curve compared to the “benchmark” 10-year and 30-year issues. It is often referred to by traders as an “orphan” issue.

1. The “Orphan” Status

Unlike the 10-year note (the global benchmark for risk-free rates) and the 30-year bond (the primary instrument for long-duration pension hedging), the 20-year bond lacks a natural, dedicated buyer base.

• 10-Year Role: Used by everyone—mortgage lenders, corporate bond pricers, and foreign central banks—as the primary reference point for the US economy.

• 30-Year Role: heavily favored by pension funds and insurance companies who need “long duration” assets to match their long-term liabilities (like payouts due in 30+ years).

• 20-Year Role: It falls in a “no man’s land.” It is too long for tactical traders who prefer the 10-year, but not “long enough” for pension funds who prefer the convexity and duration of the 30-year.

2. The Yield Anomaly (The 20s-30s Inversion)

Because of this “orphan” status, the 20-year bond typically trades with a liquidity premium, meaning investors demand a higher yield to hold it because it is harder to sell than a 10-year or 30-year bond.

This often results in a “kink” in the yield curve where the 20-year yield is near or even inverted to the 30-year yield.

This phenomenon occurs because demand for the 30-year is structurally higher (due to pensions), pushing its price up and its yield down, while the 20-year languishes with less demand, keeping its price lower and yield higher.

3. Liquidity and Trading

• Volume: The 20-year bond sees significantly less trading volume than the 10-year and 30-year issues.

• Volatility: Due to lower liquidity, the 20-year yield can be more volatile and prone to erratic moves during market stress compared to its neighbors.

Overview: The Auction Process

The US Department of the Treasury sells bills, notes, and bonds to finance the US government’s debt. These auctions are closely watched by traders (Forex, Equities, and Bond traders alike) because they provide a direct read on the demand for US assets and the direction of interest rates.

When the auction results are released, the market immediately compares the actual data against the “Pre-Auction” expectations.

Key Metrics for Auctions of US Treasuries.: A Bulleted Review

1. The WI Level (When-Issued Yield)

The “When-Issued” market is essentially a futures market for the Treasury security that is about to be auctioned. It trades in the days leading up to the auction and right up until the auction deadline.

• The Benchmark: The WI yield at the exact time of the auction bidding deadline (1:00 PM ET) is the “expected” price.

• The “Stop” (High Yield): This is the actual highest yield accepted by the Treasury to sell the entire auction amount.

• The Tail: If the Auction Stop yield is higher than the WI yield, it is called a “Tail.” This is bearish (bad demand) because the Treasury had to offer a cheaper price (higher yield) than the market expected to get the deal done.

• Stop-Through: If the Auction Stop yield is lower than the WI yield, it is a “Stop-Through.” This is bullish (strong demand) because buyers were willing to accept a lower yield than expected to secure the paper.

2. Bid-to-Cover Ratio

This is the primary measure of overall demand depth. It is calculated by dividing the total dollar amount of bids received by the amount of debt being sold.

• Measurement: A ratio of 2.5 means there was $2.50 of demand for every $1.00 of debt sold.

• Interpretation: A higher number indicates stronger demand. Traders usually compare today’s Bid-to-Cover against the “Six-Month Average” or the previous ten auctions to see if demand is rising or falling.

3. Indirect Bidders

These are buyers who place bids through a primary dealer rather than directly with the Treasury.

• Who they are: This category is heavily dominated by Foreign Central Banks (via the Fed) and international investors.

• Significance: This is widely viewed as a proxy for Foreign Demand. A strong Indirect number (e.g., 65% or higher) suggests that foreign entities remain confident in the US Dollar and US debt, which is generally supportive of the USD.

4. Direct Bidders

These are non-primary dealer institutions that place bids directly with the Treasury.

• Who they are: Domestic money managers, hedge funds, pension funds, insurers, and occasionally individuals.

• Significance: This is a proxy for Domestic Demand. If the Direct bid percentage rises, it often signals that US-based investment funds see value in the current yield levels.

5. Dealers (Primary Dealers)

Primary Dealers are large banks (like Goldman Sachs, JPMorgan, etc.) that are obligated to bid in Treasury auctions to ensure the debt gets sold.