Treasury yields are under increasing pressure as the US government sold a staggering $701 billion of Treasury securities this week, spread across nine auctions, encompassing both 10-year Treasury notes and 30-year Treasury bonds. Of these auction sales, $160 billion were notes and bonds, further impacting the yield landscape.
The yield at the 10-year Treasury auction (4.177%) was slightly higher than the previous month’s auction (4.173%). Conversely, the yield at the 30-year auction (4.750%) decreased compared to a month ago (4.825%). The 3-year note yield experienced a significant drop of over 9 basis points, settling at 3.518%, positioning it below the majority of T-bill yields sold during the week.
| Notes & Bonds | Auction date | Billion $ | Auction yield |
| Notes 3-year | Feb-10 | 74 | 3.518% |
| Notes 10-year | Feb-11 | 54 | 4.177% |
| Bonds 30-year | Feb-12 | 32 | 4.750% |
| Notes & bonds | 160 |
Additionally, $541 billion were allocated to Treasury bills with maturities ranging from 4 weeks to 26 weeks, primarily intended to replace maturing T-bills.
| Type | Auction date | Billion $ | Auction yield |
| Bills 6-week | Feb-10 | 95 | 3.635% |
| Bills 13-week | Feb-09 | 94 | 3.600% |
| Bills 17-week | Feb-11 | 69 | 3.595% |
| Bills 26-week | Feb-09 | 81 | 3.500% |
| Bills 4-week | Feb-12 | 105 | 3.630% |
| Bills 8-week | Feb-12 | 95 | 3.630% |
| Bills | 541 |
The yield of the 13-week Treasury bills, standing at 3.60%, saw an increase from 3.56% a month prior, suggesting a diminished market expectation for a rate cut within the security’s 3-month timeframe.
In the secondary market, the three-month yield closed at 3.68% on Friday, slightly up from 3.67% a month ago, exceeding the Effective Federal Funds Rate (EFFR), which the Fed targets with its policy rates.
Conversely, the 26-week Treasury yield at this week’s auction decreased to 3.50%, lower than the previous month’s 3.58% and below the EFFR, implying a potential for a rate cut within its 6-month horizon. You can find more related Finance news on our site.
The Fed’s rate cuts have exerted downward pressure on T-bill auction yields. However, note and bond auction yields are influenced by bond market dynamics, reflecting expectations for future inflation and the supply of Treasuries needed to finance escalating deficits.
Deficits and Treasury Yields
The 10-year Treasury notes, auctioned on Wednesday, yielded 4.177%. In the secondary market that day, the 10-year yield closed at 4.18%. Since the auction, the 10-year yield has decreased by 13 basis points, closing at 4.05% on Friday, the lowest since late November. Since the start of February, it has decreased by 24 basis points.
Lower bond yields correlate with higher bond prices, benefiting leveraged bond traders. Wednesday saw yields increase following positive private sector hiring news. However, the market reversed course on Thursday, and Friday’s headlines regarding a “soft” CPI report further propelled bond prices and lowered yields.
Treasury yields are constantly fluctuating, creating a yo-yo effect in the market. Is a bounce next?
The $54 billion of 10-year notes sold this week at 4.177% replaced $25 billion in 10-year notes sold in February 2016 at 1.73%, which matured on Sunday. This resulted in a $29 billion increase in the total amount of 10-year notes outstanding. Bond math, as deficits balloon, is relentlessly brutal.
At the 30-year Treasury auction on Thursday, strong demand pushed the auction yield down to 4.75%. In the secondary market after the auction, the 30-year yield further declined to 4.72%, easing to 4.70% on Friday, down 12 basis points in two days. Despite this, the yield remains above the middle of its two-year trading range.
The Impact of Treasury Issuance
The Treasury Department has indicated its intention to prioritize increased T-bill issuance over notes and bonds to manage the deficit. This strategy aims to alleviate upward pressure on long-term yields, addressing the bond market’s concerns about future supply and potential yield increases needed to attract new buyers.
“The Treasury Department was just jawboning, and the market loved to hear it.”
The ratio of T-bills outstanding to total Treasuries held by the public has remained relatively stable over the past four months. As of the end of January, it stood at 21.7%, slightly up from December but down from October and November, and lower than in 2024.
The issuance of notes and bonds has increased at approximately the same rate as T-bill issuance. The $54 billion of 10-year notes sold at auction replaced $25 billion in notes sold 10 years ago, maturing this Sunday. This process, repeated monthly with each note and bond auction, inevitably increases the total amount of notes and bonds outstanding.
Even without further increases in note and bond auction sizes, the total outstanding debt will continue to grow relentlessly. The introduction of 20-year bonds in 2020, after a long hiatus, further contributes to this increase, as the new issuance doesn’t replace any maturing bonds.
Treasury Yields and Market Expectations
So, while the Treasury Department has talked about a shift to a larger share of T-bills, it hasn’t actually occurred yet since note and bond issuance is far larger than the maturing notes and bonds they replace, thereby pushing up the total amount of notes and bonds outstanding.
Source: Wolf Street
