One would think that the first 3-year Treasury auction after the Fed rate cut went well, but it wasn't.
On Tuesday, October 8, the United States Treasury auctioned $58 billion of three-year Treasury bonds, equaling the all-time high in the issuance of U.S. Treasury bonds of that maturity. The auction results were unexpectedly poor, and demand was well below expectations.
The winning interest rate for this auction was 3.878%, the highest since July this year. The pre-issue rate for this auction is 3.871%, which is 0.7 basis points lower than the final winning rate. This is the first and largest tail spread since June this year, reflecting weak demand.
The auction had a bid multiple of 2.45, the lowest since June, compared to 2.66 in the previous auction and an average of 2.57 in the last six auctions.
Direct bidders, a measure of domestic demand in United States, including hedge funds, pension funds, mutual funds, insurance companies, banks, government agencies and individuals, were allotted 24 percent, the highest in a decade, and were a highlight of the auction.
As a measure of overseas demand, the proportion of indirect bidders, which are usually tendered by institutions such as foreign central banks through primary dealers or brokers, was allocated only 56.9%, the lowest since 2024 and plunging from a record 78.2% in the previous month.
Primary dealers, who are the "receivers" who take on all unpurchased supply, were allotted 19.2% in this round, the highest since June, indicating weak real demand.
Financial blog Zerohedge commented that overall, it was a very bad auction, and considering that the market no longer expects the Fed to cut interest rates sharply in the coming months, the dismal US Treasury auction is actually expected, considering that US Treasury yields have soared sharply in recent weeks.
The bigger question, Zerohedge added, is when we will have a more sustained sell-off in Treasuries, which will force the Fed to rush back and commit to more accommodative monetary policy amid trillions of dollars in debt issuance.
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