Headed into this week, there was some consternation that Monday’s 20-year sale would evidence the same sponsorship concerns that bedeviled US duration for the better part of three months through late-October.
The 20-year’s an eccentric security, to employ a polite euphemism. Although Treasury has endeavored to support demand by limiting auction sizes versus 10- and 30-year sales, it’s still a black sheep. And Janet Yellen needed to sell $16 billion worth into the pre-Thanksgiving void.
Yields are obviously much lower than the last 20-year auction stop, another potential headwind for Monday’s supply event, which played out in the shadow of the demonstrably poor 30-year sale on November 9.
Happily, Monday’s 20-year auction went over quite well all things considered, stopping through 0.9bps. Dealers took just 9.5%. The indirect award was 74%, nearly three percentage points higher than average.
This may sound trivial or otherwise esoteric, but it’s important. The lackluster 30-year auction stood out as an uncomfortable reminder of the supply concerns which drove yields sharply higher from late-July. Treasurys rallied sharply in November, a month defined by bullish developments for the previously besieged long-end. Simply put: The long bond sale was a blight on an otherwise great month.
The solid reception for the 20-year bond on Monday may suggest the 30-year debacle was, at least partly, a false optic. (Recall that technical issues tied to the ICBC hack were widely seen as a factor in the optically poor results for the long bond sale.)
Some professional investors have turned broadly bullish on bonds amid softer US macro data and speculation that the Fed’s not only done raising rates, but perhaps poised to implement so-called “insurance cuts” beginning as soon as March. For example, 61% of panelists in the November installment of BofA’s Global Fund Manager survey said they expect lower long-end yields in the year ahead, the highest share on record.
Treasurys, which were on track for an unprecedented third consecutive annual loss, may be able to eke out a gain for the year thanks to this month’s rally, which counts as the best since March.
“20s were the only coupon tenor that didn’t see a boost to issuance this quarter and the recent underperformance of 20s on the curve with the 10s/20s/30s cash butterfly at the cheapest levels in four weeks enhances the relative value case for 20s versus the wings,” BMO’s Ben Jeffery said Monday, adding that “investors have begun to receive more consistent evidence of the lagged influence of tighter monetary policy and it has become increasingly consensus the FOMC has reached this cycle’s terminal rate which we suspect has added to the bullish backdrop for duration.”
Maybe they want the bonds after all.
