Improving conditions in the equity markets and speculations about rising inflation in the near future, have risen concerned about the success of treasury auctions for long maturities like 30 Year Bond and 10 Year Note. However treasury buying has been very strong since the June auction, sending the 10 Year Note yield below 3.20% and 30 Year Bond yield below 4.00% on both 10/01 and 10/07 respectively, which are level not seen since the beginning of the year when the market was in worst conditions then now.

Bear Market A bear market for treasury bonds with maturities of 10 Years and higher can be on the way. The following are compelling reason for this thesis. Auction results are posted on table 1 at the bottom of the page or here

Recent Auctions The result of the last round of auctions was mixed. On 10/06 the 10 Year Note auction was very strong with a bid/cover ratio of 3.01 and high yield of 3.201 but the 30 Year Bond auction was weak for the first time in months with a bid/cover ratio of 2.37 and a high yield of 4.009%.

Trading Patter The week before the auction on September 28, equity market pulled back due to worst then expected manufacturing data and employment data, however treasury securities reaming unchanged, signaling a possible change of trend. Yields from 30 Year Bond closed on Friday October 02 at 4.011%, a small decline in yield from Monday’s close at 4.045%, the same situation happened for 10 Year Note where yields fluctuated from 3.302% on Monday to 3.221% on Friday

Geithner Factor Beginning in June, auctions experienced a sudden increase in demand from indirect bidders, giving the impression that foreign demand for domestic debt was stronger than ever. But in a little noticed switch on June 1, Geithner appears to have used some artifice in redefining ‘indirect’ buyers to include not only foreign entities but also domestic buyers who place orders to purchase Treasuries through a primary dealer. This “little change” of information reached bond desk just few weeks ago and now traders are speculating that foreign demand is not very strong after all and that yields could be too low at the moment to spur demand. If that’s the case, the fed will have no other option then raise rates.  

 Auction size Supply for recent actions reached levels. The auction size for 10 Year Note has been above 19B and above 11B for the 30 Year Bond since February 2009. The fed is probably going to reduce the auction size at the beginning of the 1^stQ 2010 which will cause a rise in yields, as the fear of inflation is rising and the foreign demand is now uncertain (see the Geithner Factor).

Conclusion Treasury yields are definitely on the rise with the 10 Year Note possibly reaching 4.00% and the 30 Year Bond reaching 5.00% in the 4^th Q of 2010.

10 Year Note Auction Results

30 Year Bond Auction Results

Table 1