The Treasury Department is set to conduct a $13 billion auction of 20-year government bonds on Wednesday, which is seen as a significant test of the market’s appetite for long-dated Treasurys. This auction has the potential to either alleviate or worsen the ongoing selloff that has been observed during the New York session.
During Wednesday morning trading, the selloff drove the 30-year Treasury yield past 5%, reaching its highest close since Aug. 15, 2007. Similarly, the benchmark 10-year yield also surged to 4.9%, while its 20-year counterpart rose to around 5.2%.
The market selloff can be partly attributed to a series of stronger-than-expected U.S. economic data, such as the retail sales report for September. This unexpected positive data has surprised analysts and led to upward revisions in third-quarter economic growth forecasts on Wall Street. Morgan Stanley, for instance, now expects a growth rate of 4.9% for that quarter, up from the previously predicted 4.5%. Despite geopolitical risks arising from Israel’s conflict with Hamas and the Federal Reserve’s decision to reduce its purchases of Treasury bonds through quantitative tightening, the U.S. economy remains resilient.
According to Daniel Tenengauzer, a strategic adviser based in New York, the increase in supply of Treasury issuances and the Federal Reserve’s scaling back of purchases have driven the selloff in long-dated Treasurys. This has resulted in a bear steepening environment, where long-term interest rates are rising at a faster pace than short-term rates. Additionally, because investors can obtain high yields in the short end of the market, there is less incentive for them to assume the risk associated with longer-term Treasurys.
Moreover, higher Treasury yields have been impacting the equity market since last year. As of late Wednesday morning, all three major U.S. stock indexes were experiencing losses as the 10- and 30-year Treasury yields continued to rise above their highest levels since 2007. Since their respective 52-week lows on April 5 and Dec. 7, these yields have surged by more than 150 basis points.
Overall, this Treasury auction will be closely observed to gauge demand for long-dated bonds in the current market climate. The results could have implications for both the bond market and the equity market going forward.