The 10 yr note auction was terrible. The yield of 3.625% was almost 4 bps above where it was pricing in right before. The bid to cover of 2.31 was below the one yr average of 2.44 and that’s the 2nd weakest since September 2020. Direct and indirect bidders took half the auction, leaving dealers with the balance which is the 3rd most since July 2022.
Bottom line, after a nice drop of about 75 bps over the past few months in the 10 yr yield, demand here was pretty tepid and in the face of dramatic curve inversion. Looking at the downward trend in inflation and the inevitable recession at the same time the Fed keeps hiking into this has led to this long end Treasury rally for sure. But, I remain much more confident that the short end is the better place to be because of major external influences outside of the growth and inflation analysis that will impact the long end. I still claim a huge lack of confidence on where long rates go because of the unknowns of how ECB QT will go starting in Q1, what will happen to Japanese YCC when Kuroda leaves at the end of March, the lack of bank Treasury buying and outright central bank selling all at the same time Treasury supply is about to skyrocket and the budget deficit will as well (they of course are intertwined) as tax receipts falter in the slowing economy.
I also like short term TIPS (out to 5 yrs) because I think the current inflation breakeven of 2.40% is pricing in a pipe dream and that inflation will average 3-4% over the next half decade.
In response to the poor auction results, bond yields are at the highs of the day.
Intraday 10 yr Yield move
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.