The U.S. Treasury will auction $16 billion in 20-year Treasury notes on Wednesday, with a pre-auction trading yield of approximately 5.27%. If this yield holds until the auction, it will be the highest since issuance of this maturity was reinstated in 2020. Previously, 10-year and 30-year Treasury notes were auctioned at yields of 4.683% and 5.216%, respectively, the highest auction yields since 2007 and 2001.
However, a high yield does not necessarily mean a failed auction: last week, the bid-to-cover ratio for the 30-year note was still 2.39, indicating that demand is not out of control. The more important factor this time is whether the winning yield is higher than the pre-auction trading level, i.e., whether there is a "tail difference," as well as the proportion of indirect bidders and the proportion of primary dealers forced to take over the bonds.
If the 20-year yield continues to show a tail-end spread and dealers increase their acceptance, it indicates that even if expectations of interest rate hikes cool, investors are still demanding higher fiscal, inflationary, and term compensation, and long-term interest rates are gradually deviating from the Fed's policy path; conversely, if high yields attract long-term funds, it means the market is still willing to absorb supply.
