Nov 15, 2021 - Economy & Business

Inflation data spurs weak 30-year Treasury auction

An illustration of a $100 bill with a line graph line running through it.

Illustration: Annelise Capossela/Axios

Jitters from the latest inflation data popped up across the market, from a selloff in equities to medium-term Treasury yields zooming higher.

Another under-the-radar result: A startlingly weak auction for 30-year Treasuries.

Why it matters: A sloppy Treasury auction could send signals about investor demand and the direction of rates — so markets will be watching to see if there’s a repeat.

What's happening: Wednesday’s auction produced an unusually large tail — a measure of the difference between the expected and actual interest rate (5.2 basis points, in this case).

  • “The tail of the auction was quite dramatic … It's been several years since we saw a tail of this magnitude,” Subadra Rajappa, head of U.S. rates strategy at Société Générale, tells Axios.
  • The bid-to-cover ratio — the number of bids for the paper being offered — was also the lowest in an auction since February. Primary dealers like banks took down a larger than normal portion of the notes because other bidders stepped back, according to a Société Générale research note.

The big picture: This all signaled that for a time on Wednesday, demand for the notes was less than expected.

  • "Given the strength in the [CPI] data earlier in the morning, that probably weighed on people's decisions,” says Steve Rodosky, PIMCO portfolio manager for real return and U.S. long-duration strategies.
  • Another factor: the surprisingly low level to which rates had sunk, even as inflation picked up, may have given bidders pause, Rajappa says.

Yes, but: “I wouldn't extrapolate too much from one auction result. A bigger concern would be if we see more auctions like this, where there's weak demand from end investors,” Rajappa adds.

The bottom line: Stocks have recovered much of their post-CPI losses, and Treasuries have stabilized.

  • But with another strong inflation print likely next month, and more investors betting that rates will soon rise, watch for more volatility in Treasuries.
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