Treasury's 20-Year Auction Tails as Direct Bidders Step Up and Indirect Demand Cools

Wednesday's 20-year sale sent two signals at once: the Treasury had to pay up to borrow for two decades, but the buyers who showed up in force were domestic, dealers were left with little, and yields refused to move.

The Treasury sold $13 billion of reopened 20-year bonds on Wednesday, Oct. 21 at a high yield of 5.469%. The when-issued yield at the 1 p.m. Eastern bidding deadline was 5.460%, so the auction tailed by 0.9 basis point — the difference between 5.469% and 5.460%, computed from the two yields. The sale reopened the 5.125% bonds maturing Aug. 15, 2046, first issued on Aug. 31, and the new supply settles on Friday, Oct. 23.

The median yield was 5.415% and the price was 95.853363 per $100 of face value, the Treasury's official results release said. Demand in total was stronger than usual: investors bid $35.48 billion for the $13 billion on offer, a bid-to-cover ratio of 2.73, above the 2.62 average for recent sales reported by InvestingLive and up from 2.57 at the prior reopening of the same bonds on Sept. 15, which had stopped at a high yield of 5.420%.

Directs stepped up; indirects held back

The split of the awards was the sale's most distinctive feature. Direct bidders, a category dominated by domestic institutions bidding for their own accounts, took 31.6% of the competitive awards, well above the 22.9% average, while indirect bidders, the group that includes foreign central banks and international investors, took 58.2%, below their 65.2% average. Primary dealers were left with just 10.3%, less than the 11.9% average, because end investors absorbed more of the sale. In dollar terms the Treasury awarded $4.075 billion to direct bidders, $7.503 billion to indirect bidders and $1.323 billion to primary dealers, its results release said.

A tail the market shrugged off

A tail usually signals slightly weaker demand — the Treasury had to pay up to get the bonds away — and Tom di Galoma, managing director of global rates trading at Mischler Financial Group, described the sale as having tailed by nearly a basis point, MarketWatch reported. Yet the broader market barely reacted: the 20-year yield was steady at 5.46%, 2 basis points lower on the session, according to FactSet data cited by MarketWatch, and Dow Jones coverage put the yield little changed near 5.468% after the deadline.

The curve's unloved kink

The 20-year sector remains the curve's awkward middle. Before the auction the 20-year yielded 5.48%, above both the 10-year at 5.12% and the 30-year at 5.42%, according to FactSet — a kink that reflects persistently thinner demand for this maturity than for its neighbours. Wednesday's 5.469% stop was also the highest high yield at a 20-year auction since Jan. 8, 1986, when it was 9.45%, according to Dow Jones; the Treasury discontinued the 20-year bond in 1986 and resumed issuing it only in May 2020. The results were mixed and not as positive as expected, but they improved on last month's very weak results, John Canavan, lead analyst at Oxford Economics, wrote in Dow Jones coverage of the sale.

Refunding speculation and the Fed come next

What to watch: the early-November quarterly refunding announcement, where speculation has circulated that Treasury Secretary Scott Bessent could announce changes to, or cuts in, the auction sizes of longer-dated debt in a bid to keep a lid on yields, MarketWatch reported before the sale; no such change has been announced. The sale also landed a week before the Federal Reserve's Oct. 27-28 meeting. If indirect demand stays soft at coming long-dated sales while direct demand stays elevated, the pattern would say more about who is willing to own long duration at these yields than about the Treasury's ability to fund itself — Wednesday's above-average cover says funding was never in question.