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10-Year Treasury Auction: Strong Demand Takes Yields Lower, Stocks Hold Gains

Foreign buyers stepped up to take the bulk of the $41 billion 10-year notes on offer amid signals of peaking inflation and slowing domestic growth.

The U.S. Treasury sold $41 billion in 10-year notes Wednesday at a high auction yield of 1.34% as foreign buyers scooped up the benchmark paper amid signals of peaking inflation and a potentially stalled domestic recovery.  

Investors bid $2.65 for every $1 on offer from the Treasury, auction data showed, notably firmer than the 2.39 'bid-to-cover' ration recorded at the last auction on July 12, when the yield was 1.371%. 

Foreign buyers, the data indicated, took down just over 77% of the sale -- one of the highest levels on record -- suggesting the week's $126 billion in new bonds sales are unlikely to disrupt markets as investors hunt for returns in a market comprised of $16 trillion worth of fixed income assets trading with a negative yield.

Benchmark 10-year note yields rallied to 1.315% in the immediate wake of the auction, while stocks held gains with the Dow Jones Industrial Average marked 195 points higher on the session and the S&P 500 gaining 7 points.

The 10-year auction marks a potentially volatile inflection points for bond markets heading into the autumn, with Fed officials hinting at changes to the central bank's $120 billion in monthly asset purchases amid a solid economic recovery highlighted by last month's 943,000 in net new jobs, ISM activity readings that are well over the 60 mark that separates growth from contraction and record high stock markets.

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Dallas Fed President Robert Kaplan, in fact, told CNBC Wednesday that he wanted the Fed to announce tapering plans in September and begin the gradual winddown in purchases the following month. 

However, today's July inflation report suggests consumer prices may be ready to peak, and the JOLTs jobs reading earlier this week showed a record 10.1 million positions in the world's largest economy have yet to be filled. 

Meanwhile, companies ranging from General Motors  (GM) - Get General Motors Company (GM) Report to Apple  (AAPL) - Get Apple Inc. (AAPL) Report, Amazon  (AMZN) - Get Amazon.com, Inc. Report and Tesla  (TSLA) - Get Tesla Inc Report cautioning that supply chain disruptions would impact revenue growth and margin prospects in the months ahead, has some investors re-thinking growth prospects at home while rising Delta-variant infections in Asia are blunting sentiment in markets outside of western Europe.

Southwest Airlines  (LUV) - Get Southwest Airlines Co. Report added to the concern Wednesday when the carrier slashed its current-quarter revenue forecasts amid a jump in cancellations linked to the Delta-variant surge in many southern states. 

In fact, according to recent data from Bank of America's recent 'Flow Show' report,  bond funds attracted $12.7 billion in inflows last week, a 51.2% increase from the prior period, ahead of signals from the Treasury that it may begin decreasing the amount of bonds if offers for auction over the final months of the year.

The Treasury said last week that it plans to sell $673 billon in new bonds this quarter as part of a $1.5 trillion second-half funding target that is predicated on lawmakers lifting a suspension of the debt ceiling, which expired last week at $22 trillion.