Does a Weak 10-Year Treasury Auction Mean the Bond Rally Is Finally Toast?

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Treasury yields may still be too low for most sensible U.S. investors to chase today, but the yields on long-term rates have started ticking back up from the post-Brexit lows. Maybe a record stock market has at least a little allure now when you compare the dividends versus bonds. The 30-year Treasury long bond had a yield of 2.25% and the 10-year note yielded 1.52% on July 12. Only 7 of the 30 Dow Jones Industrial Average stocks had a yield of less than the 30-year Treasury.

This and slightly better (or less bad) economic reports should set the tone for a fight in Treasury auctions ahead. Tuesday’s 10-year Treasury auction came with a yield of 1.516%. That was 1.5 basis points higher than the 1.501% for the 10-year Treasury in the same morning, ahead of the auction results.

A driving force for a weak auction was that the bid-to-cover ratio was only 2.30 — versus over 2.60 as an average so far in the last year. This means that $2.30 bids were submitted for ever $1.00 accepted by the Treasury. All in all, some $46,572,996,500 was tendered and the Treasury accepted $20,000,001,500 in the auction.

Another issue was that dealers took in almost 38% of the sale. This dealer rate has been running about 25% of late. In short, primary dealers and financial institutions were over one-third of the whole auction.

Tuesday’s median yield was 1.470% and the low yield was 1.395%. This was for the 1.625% coupon with a nine-year and nine-month maturity.

What investors need to keep in mind here is that a 1.516% yield means that the end result, before federal tax, is $15.16 per year received by the note-holders for every $1,000 face value.

Another consideration is that the 10-year Treasury yield was 1.74% prior to the Brexit vote. It immediately fell to 1.58% the following day and 1.46% the day after that. Ultimately, 10-year yields hit a low of just under 1.35% before this last rise in rates.

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