If bonds are rallying, yields are dropping, often due to worries that the economy will slow down or that bonds will be more desirable than stocks. It does not always work out that way, but investors saw a surprise in the 10-year Treasury auction on Wednesday.
The Treasury’s $24 billion came with a bid-to-cover ratio of 2.63, meaning demand to buy at the auction was $2.62 for every $1 accepted. What stands out is that the 2.612% yield was the lowest at a 10-year Treasury auction since June of 2013.
Russian tensions must be helping here. Indirect bidders, a sign of foreign bank interest, took a high 49.3% of the auction. Direct bidders took 21.6% of the auction. The on-the-run Treasury yield was just above 2.58% after the auction.
Another driving force for Treasury demand was that Fed Chair Janet Yellen gave some added comfort to bond investors that they will get to enjoy very low interest rates for a considerable period. Watchers also heard Yellen signal that the end of quantitative easing and an eventual wind-down of the Fed’s balance sheet would remain orderly.
All things being equal, the low 10-year auction yield comes at a time when the jobs data is looking better and better, at the same time that gross domestic product was only up by 0.1%.