10-Year Treasury Auction Drives Yields Up

The Treasury Department's $19 billion auction of 10-year notes attracted greater foreign interest, but the sale also drew a higher-than-expected yield and ultimately disappointed investors.

Wednesday's auction drew a high yield of 3.99%, compared to forecasts of 3.97%, and the bid-to-cover ratio for the 10-year notes was 2.62, lower than the five-auction average of 2.88, according to Briefing.com.

While the indirect bidder take was fairly strong at 34.2%, which indicates high interest from foreign central banks, the higher-than-expected yield spooked the stock market. After the results were announced at 1 p.m. EDT, the 10-year note dropped 25/32 in price, pushing the yield higher to 3.96%, and the major U.S. indices slid to their worst levels of the session.

The Dow Jones Industrial Average was recently down 95 points, or 1.1%, at 8668, and the Nasdaq Composite was off 11 points, or 1.2%, at 931. The S&P 500 was lower by 27 points, or 1.4%, at 1834.

The 10-year note auction is the second of three this week. Tuesday's $35 billion sale of 3-year Treasury notes was considered a success, drawing a yield of 1.96% and a bid-to-cover ration of 2.82. Indirect bidders for 3-year notes, which includes foreign central banks, was 43.8%, better than it has been in previous months. On Thursday, the Treasury will hold an $11 billion, 30-year bond auction.

Robert Pavlik, chief market strategist with Banyan Partners, called the 10-year note auction the most important of the three as it acts as a benchmark. The 10-year note is closely tied to interest rates on mortgages and other consumer loans. The concern now, he says, is that rates will rise as the government's debt load ramps up.