High yields on US bonds are beginning to attract purchases of $39 billion 10-year treasury bonds, strong demand, and long-term yields return to gains

The Zhitong Finance App learned that the trend of US Treasury bonds diverged on Wednesday. Previously, the $39 billion 10-year US bond auction recorded strong demand, indicating that as yields rose to decades-old highs, some large investors began to re-enter the market. After the auction results were announced, long-term US bond yields recovered some of the day's gains.

The US Treasury's winning bid yield for this $39 billion 10-year treasury bond auction was 5.3%, which is significantly lower than the yield level of the secondary market before the auction, indicating strong demand from investors. The bid multiplier rose to 2.77 times, the highest level since 2016; the allocation ratio for non-dealer investors reached a record 97.5%.

Monty Gandhi, an interest rate strategist at Sumitomo Mitsui Banking Corporation (SMBC), said that the auction showed that large investors with strong capital are finally beginning to think that the current level of yield is attractive. He pointed out that previously, when the yield was close to 5%, some large investors had already begun to close their short positions on US bonds, and may now be gradually buying back.

After the auction ended, the 10-year US Treasury yield fell back to around 5.28%, a significant drop from 5.36% once hit during the day. 5.36% is a level not seen since 2002. The 30-year US Treasury yield rose only about 1 basis point to 5.67%, and had previously risen further due to rising oil prices. Short-term US bonds performed relatively well, with 2-year yields falling about 3 basis points to 4.76%.

Over the past few weeks, global bond markets have continued to be under pressure. High energy prices have heightened market concerns about rising inflation and further interest rate hikes by central banks. At the same time, companies are raising large amounts of capital for artificial intelligence infrastructure construction and are also competing with the government for capital. On Wednesday, after Iran attacked ships in the Strait of Hormuz again, the price of Brent crude oil once again topped 102 US dollars per barrel.

Evelyne Gomez-Liechtenstein, a multi-asset strategist at Mizuho International, said that the bond market is currently being pulled by two forces. On the one hand, the absolute yield on US bonds has reached a very attractive level; on the other hand, the risk of inflation caused by rising oil prices has not subsided.

US Treasury Secretary Bessent once again stated during a White House event on Wednesday that the recent rise in bond yields is a “global phenomenon.” He believes that unlike other countries, the rise in US yields mainly reflects higher real interest rates rather than worsening inflation expectations. The main reason behind this is that the US economy is still strong. At the same time, Bezent reiterated that once the conflict in Iran eases, energy prices are expected to drop, and market interest rates for different periods will also fall accordingly.

Despite this, this 10-year US bond auction shows that the current high yield has begun to attract capital into the market. Next, the market will focus on the $22 billion 30-year US bond auction to be held on Thursday. The yield on this batch of bonds is likely to reach the highest level since 2000. After the 30-year treasury bond auction, the US Treasury will also implement a bond repurchase, planning to buy up to 6 billion US dollars of US debt with a remaining period of 20 to 30 years. This will be the fourth such operation carried out by the Ministry of Finance since long-term yields rose to multi-year high levels and expanded the repurchase program.

Meanwhile, the short-term US bond yield curve has recently shown some signs of stabilization. The inflation and labor market data released last week were weaker than expected. Coupled with a number of central bank officials sending relatively moderate policy signals, the market lowered expectations for further interest rate hikes by the Federal Reserve.

The minutes of the Federal Reserve's September meeting showed that all 19 officials supported the interest rate hike that month. Many of them believed it was necessary to prevent further inflationary pressure by raising interest rates. However, the current interest rate swap market predicts that the probability that the Federal Reserve will raise interest rates this month is about 25%, and another rate hike before the end of the year has been fully factored into the pricing by the market.

John Briggs, head of US interest rate strategy at the French Foreign Trade Bank, said that the market has shown some signs of stabilization in the past week, especially at the short end of the yield curve, but now the long term is also beginning to show investor demand. Although it is still too early to judge that the sell-off in US bonds has ended, this strong 10-year treasury bond auction has sent at least a positive signal.