A key indicator of auction Treasury demand jumped to the highest levels in six months Wednesday as investors snapped-up new 10-year paper following a softer July inflation report.
The U.S. Treasury sold $35 billion in 10-year notes Wednesday at a high auction yield of 2.755% as foreign buyers snapped-up the new paper following a notably softer July inflation reading.
Investors bid $2.53 for every $1 of 10-year notes on offer from the Treasury, auction data indicated, a notably firmer tally than the 2.34 ‘bid-to-cover’ ratio recorded at the last auction on July 12, when the yield was 2.96%, and the near-term average of 2.47. Prices and yields in the bond market move in opposite directions, making today’s paper more expensive than it was in early July.
Foreign buyers, the data indicated, took down just under 75% of the sale, up 15 percentage points from the July sale and well ahead of the recent average of around 70%.
U.S. inflation slowed notably last month, data from the Bureau of Labor Statistics indicated Wednesday, setting the possibility of a pause in Fed rate hikes and triggering a big pre-market jump for U.S. stocks.
The headline consumer price index for the month of July was estimated to have risen 8.5% from last year, down from the 9.1% pace recorded in June and firmly inside the Street consensus forecast of 8.7%. The June reading was the fastest since December of 1981.
On a monthly basis, inflation was flat the BLS said, compared to the June increase of 1.3% and a May reading of 1.1% and again fell below the Street forecast of a 0.2% acceleration.
Inflation is often referred to as the ‘enemy of bonds’, as it erodes the value of fixed income payments, so buyers would likely be more attracted to today’s auction given both the softer-than-expected July CPI reading as well as the mixed set of economic data that has lead to recent recession concerns.
Benchmark 10-year note yields bumped modestly higher, to 2.76% in the immediate wake of the auction, while 2-year bonds held near 3..121%, levels that maintain the steepest “inversion” of the yield curve since the early 2000s.
Investors typically associated a sustained inversion as a signal of near-term recession as traders sell short-term notes in anticipation of Federal Reserve rate hikes, but buy longer-dated paper in advance of an economic slowdown.
According to a study from the San Francisco Federal Reserve, a sustained inverted yield curve has preceded all of the nine recessions the U.S. economy has suffered since 1955, making it an extremely accurate barometer of financial markets sentiment.
Stocks were little-changed with the Dow Jones Industrial Average marked 500 points higher on the session and the S&P 500 moving 7.5 points to the upside in mid-day trading. The Nasdaq Composite was marked 5 points higher from last night’s close.
