The US Sold Five-Year Notes at Its Highest Yield Since 2006

The US Sold Five-Year Notes at Its Highest Yield Since 2006

The Treasury sold $70 billion of five-year notes on Tuesday at 5.033%, the highest yield on that maturity since June 2006.

The demand numbers look worse than the yield. The bid-to-cover ratio came in at 2.212, the lowest since December 2018, and indirect bidders, the group that includes foreign central banks, took 54.3% against 61.5% at the previous auction. The notes cleared about 3 basis points above where the market had priced them beforehand, the widest gap on the chart since 2018.

Two weeks earlier the picture was the opposite. At the 30-year auction on 10 September, indirect bidders took 79.5%, the second-highest share ever recorded, and primary dealers were left with just 2.21%, a record low. Same issuer, two weeks apart, and the long end was fought over while the belly went begging.

The two maturities are bets on different things. A 30-year bond is a bet on average rates over decades, and above 5.3% pension funds and insurers start to find that attractive. A five-year note is a bet on the policy rate path over the next few years, and markets are currently raising the odds of another hike. Buying the belly now means betting rates have already peaked.

One auction is not a trend, and seven-year notes come to market at the end of the month. But the message is specific: the hard part is not selling US government debt. It is selling the maturities that require a call on the Federal Reserve.

Source: US Treasury auction results and Bloomberg (Image: @zerohedge)