The current level is still a long way from falling below 1, which would mark a failed auction, and no sale since at least 1983 has come closer than 1.22, a low mark set in October 2008 and May 2003. While nobody expects demand to test that level any time soon, the recent drop-off has raised plenty of eyebrows.
“The market is going to need a bit of time to adjust to sizes going up,” said Aaron Kohli, director of fixed-income strategy at BMO Capital Markets. “When bid-to-covers were high and rising, it was when the Fed’s buying was driving yields lower. If the Fed is on the warpath, Treasuries aren’t the best thing to hold, and certainly your demand is going to take a hit.”
Post-crisis financial regulations have made it more costly for primary bond dealers, which are obligated to bid at auctions, to soak up the additional Treasury supply. And to Kohli, there’s only one foolproof way to attract more bidders: higher yields.
But for bond traders, the day-to-day implications are less clear. Take last month’s 10-year auction. Demand was the ninth-lowest since the start of 2009. In all the instances it was lower, yields fell four times and rose four times in the following month. Sometimes, Treasuries rallied into the offering; on other occasions, they were in the midst of a selloff.
Grand Conclusions
That’s why some strategists are reluctant to draw any grand conclusions from the upcoming slate of auctions, particularly as investors try to assess the fallout from the latest round of tariffs imposed by President Donald Trump.
“The auction stats that come out immediately after auctions are really a referendum on how well the market is pricing in the risk and the concession built in,” said Blake Gwinn, strategist at NatWest Markets. “As far as the longer-term trend in yields, can you look at a strong auction and say clearly we’re in a bullish market? I don’t know I’d ever really go that far.”
Auction demand, of course, may change from one month to the next, but the two-year trend paints a clearer picture. For three-year notes, the average bid-to-cover ratio is close to the lowest since July 2010, while for the 30-year bond, it’s hovering around its post-crisis lows.
As supply increases and Fed rate hikes build up, it’s only a matter of time before the burgeoning debt load starts to weigh on bond investors.
“This supply issue is going to cause a lot of pressure on the market,” said Simons. “It’s just taking some time for that effect to be built into people’s expectations, because we’ve only had one month of the larger auction sizes.”
This article was provided by Bloomberg News.