Treasury Rates Jump as Poor Auction Puts Focus on November Sales

(Bloomberg) — Treasury yields surged Wednesday after poor demand for a sale of five-year notes deepened anxiety about auction size increases expected to be announced next week.

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The $52 billion offering drew a yield of 4.899%, nearly 2 basis points higher than where it was trading moments before the 1 p.m. New York time bidding deadline, a sign that demand fell short of dealers’ expectations. Bidder-participation metrics were also weak. Dealers were awarded their biggest share of the tenor in more than a year as investor demand sagged.

Yields were already rising before the auction, reinforced by stronger-than-expected September new home sales data.

Long-maturity yields led the way with the 30-year bond’s climbing more than 15 basis points to nearly 5.10% at one stage. It’s a resumption of a selloff that lifted the 30-year yield to almost 5.18% Monday, the highest level since 2007, before it reversed course to end the day below 5%.

Treasury yields have been propelled higher in recent weeks, not only by expectations that the Federal Reserve will keep its policy rate elevated for longer than previously anticipated, but also by growth in the supply of notes and bonds. Auction sizes grew in August for the first time in more than two years, and another round of increases is expected at the next quarterly announcement on Nov. 1.

This week’s auction cycle concludes Thursday with a $38 billion seven-year note sale. It will be the last Treasury coupon sale until Nov. 7, a hiatus that may help stabilize the market.

Wall Street banks’ forecasts for the auction sizes to be announced Nov. 1 have been trickling out over the past two weeks. Many of the biggest bond dealers have predicted a repeat of the changes made in August. For example, each monthly 10-year note auction during the quarter was $3 billion larger than the one three months earlier.

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Other dealers — including those at Barclays Plc, Goldman Sachs Group Inc. and Morgan Stanley — have predicted that 10- and 30-year auctions will see smaller increases than last time.

(Adds supply calendar and outlook in last three paragraphs, updates yield levels)

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