The US treasury will auction off $25B of the “grand-daddy of them all” coupon issue – the 30 year bond. That comes the day after the US political enviroment and economic environment changed with the election of Pres. Trump and the winning of the Senate and most likely the House as well.
BMO previewed the auction saying the following:
Today’s $25 bn
long-bond auction will offer a timely assessment of the demand for duration in
a time of political transition. Trump is returning to the White House and as
the market continues to digest the broader implications for the global economy,
the results of the looming 30-year auction represent the biggest wildcard on
the immediate horizon. One could make a plausible case that with the 47th
President now confirmed, and 30-year rates back above 4.60% on a 20+ bp selloff
in today’s session alone, the magnitude of the post-election cheapening is
likely to draw a meaningful amount of dip-buying interest. On the contrary,
it’s not difficult to envision a degree of apprehension based on the likelihood
of another leg higher in yields. After all, a Trump victory has widely been
associated with greater deficit spending and reflationary pressures associated
with a pro-business agenda, tax cuts, and more aggressive tariffs. We’ve been
gravitating toward the former viewpoint and as a result, we’ll look for a stop-through
at 1pm EST.
-Vail Hartman and Ian
Lyngen
They added:
Pros
- The passage of the Election Day event risk should prove sufficient to entice dip buyers.
- The Treasury Department has reassured investors that coupon issuance will be stable for at least the next several quarters which has helped reduce a bearish supply impulse for the time being.
- The long bond has sold off more than 20 bp in today’s session alone and with 30-year rates back above 4.60%, the pent-up duration demand may translate to a strong bid from end users now that a major uncertainty has been removed from the near-term agenda.
Cons
- November is seasonally negative for 30-year supply. Over the last fifteen years, nearly three-in-four long-bond auctions tailed (by an average of 2.7 bp). More recently, five of the last six 30-year new-issues tailed in November.
- Since 2015, 30-year refunding auctions tailed more than three-quarters of the time when the preceding 10-year new-issue stopped-through.
- Non-dealers have taken a decreasing allocation at each successive new-issue auction in 2024. End users claimed 80.8% of the issue in August – excluding the 75.3% awarded to non-dealers last November, this was the smallest allocation at a 30-year refunding auction since November 2021.
Non-dealer demand was soft at the 30-year
refunding auction that followed Trump’s 2016 victory. The auction tailed by 1.6
bp and end users were allotted their smallest allocation of the year (66.9%).
Below are the 6-month averages of the major components:
- Tail: 0.5 bps
- Bid to cover: 2.4X
- Directs (a measure of domestic demand): 16.58%
- Indirects (a measure of international demand): 68.10%
- Dealers: 15.32%
The high yield at the last auction was at 4.39%. The current yield is at 4.628%