30-Year Yield Closed at 5.309%. Its Newest Bond Sold at 5.216%

Why It Matters

A Treasury auction is a promise to pay on a later date. The 30-year bond sold on August 13 was priced that Thursday and paid for on Monday, and TreasuryDirect records both dates on the same security, CUSIP 912810UW6. In the four days between them the long end of the curve kept selling off, so the buyers wired their money at a price the market had already walked away from.

The size of that walk is exact. The auction set a high yield of 5.216% and a price of 98.627017 per 100 of face value. CNBC, quoting Tradeweb at 4:52 p.m. Eastern on Monday, put the 30-year yield at 5.309%, up 4.3 basis points on the session. Repricing the same 5.125% coupon at 5.309% gives 97.253 per 100. That is 1.373 points, or 1.39%, below the auction price, and on the $25 billion awarded to the public it is $343.4 million.

Nobody has been made worse off in the sense that matters to a bondholder who intends to hold until 2056. The coupon is fixed and the principal is not in doubt. What moved is the price at which that stream can be sold today, and it moved against the newest buyers before the trade even settled. The Market Context reported on August 16 that three of the five voting Federal Reserve bank presidents wanted a rate hike at the July meeting. Monday says the argument at the short end is not the argument at the long end.

The bond settled Monday at a price the market had already left behind

TreasuryDirect lists the auction date as August 13 and the issue date as August 17, with a dated date of August 15 and two days of accrued interest at $0.27853 per $1,000. Settlement is the moment cash and bonds change hands. Everything before it is an agreement at a fixed price.

That fixed price was 98.627017. Treasury therefore collected $24,656,754,250 in cash against $25 billion of face value, a discount of $343,245,750, plus $6,963,250 of accrued interest. A bond sold below par is not unusual and it is not a mistake. It happens whenever the coupon Treasury sets, here 5.125%, comes in under the yield the auction clears at, here 5.216%.

The settlement-day mark and the issue discount are close to each other in size. They are not related. One is the difference between a 5.125% coupon and a 5.216% clearing yield on August 13. The other is the difference between 5.216% on August 13 and 5.309% at Monday’s close. They happen to be $343 million apart from opposite directions, and the coincidence is worth noticing only because it is a coincidence.

The Market Context found a similar arithmetic on the corporate side when AMD borrowed $4.75 billion at a 5.05% blended cost on August 14 and $24 million never reached its cash line. The government’s version of that gap is fourteen times larger in dollars and smaller in percentage terms, which is what a sovereign borrower gets for its trouble.

Three outlets printed three different 30-year yields on Monday, and all three are right

Bloomberg reported the long bond at 5.29% on Monday, up three basis points, in a piece by Greg Ritchie timestamped 12:44 p.m. Eastern. Seeking Alpha headlined 5.30%. CNBC, reading Tradeweb, showed 5.309% at 4:52 p.m. The three figures are not in conflict and none of them is a correction of another.

The Treasury cash market trades until 5 p.m. Eastern, hours after equities stop. A yield printed at lunchtime and a yield printed at ten to five are two observations of a market that kept moving. On Monday it moved the same direction all afternoon. Treasury’s own daily par yield curve adds a fourth number, because it is built from a 3:30 p.m. quotation and fitted to par rather than read off the on-the-run bond. Its August 14 reading was 5.25%.

The practical rule for a reader is to check the clock attached to any Treasury yield before comparing it to another one. On a quiet day the four series agree to a basis point. On Monday they spanned two.

The auction table says demand was strong and weak in the same column

Indirect bidders, the category that captures foreign central banks and fund managers, took $16,647,723,000. Direct bidders took $5,390,150,000. Together that is 88.15% of the $25.0 billion awarded, which left primary dealers with $2,866,735,000, or 11.47%. Dealers had tendered $31.942 billion, so they were filled on 8.97% of what they bid. Dealers exist to absorb whatever end investors do not want, and a small dealer award is the conventional signature of a well-bid auction.

The same table points the other way on price. The high yield of 5.216% came 6.6 basis points above the 5.150% median. The Committee for a Responsible Federal Budget noted on August 14 that the awarded yield printed above the prevailing when-issued level. That means the auction cleared cheaper than the market had expected going in. Bid-to-cover was 2.39. Strong distribution and a soft clearing price are both in the record, and any account that reports only one of them has chosen a side the data does not.

The offering was announced at $25 billion and every outlet reported that figure, correctly. Treasury created more than that. The Federal Reserve’s System Open Market Account rolled $6,323,518,500 of maturing holdings into the new bond as an add-on, which Treasury records outside the announced size and outside the bid-to-cover calculation. Total accepted was $31,323,533,800. The Fed’s share of the paper created Monday is 20.19%, and it raises no new cash for the government because it replaces bonds that matured.

The long end sold off this month while the short end rallied

CNBC’s Tradeweb readings at Monday’s close put the 2-year at 4.179%, up 0.8 basis points, against the 30-year’s 4.3. The gap between them widened to 113.0 basis points from 109.5. Measured from Treasury’s July 31 curve, the 30-year is up 3.9 basis points this month and the 2-year is down 10.1, a divergence of 14 basis points in eleven sessions.

Bloomberg attributes the long-end move to the national debt, a heavy calendar of long-dated sales, corporate borrowing for artificial-intelligence projects, and inflation that has run above target for five years. July consumer prices rose 3.4% from a year earlier. The Market Context showed on August 12 that energy is 7.4% of the CPI basket and 29% of the inflation rate. Energy is also the component most exposed to the Middle East supply story now sitting under the long bond.

Anshul Pradhan, head of US rates strategy at Barclays, told Bloomberg the firm has been “arguing against fading the long end sell-off, and we continue to do so”. Equities finished lower on the same session, with the S&P 500 at 7,745.06, down 0.52%, and the Dow at 53,459.78, down 0.51%, per CNBC. The 2007 peak for the 30-year was 5.44%, which leaves 13.1 basis points between Monday’s close and a twenty-year high.

What to watch

1. Treasury’s Daily Treasury Par Yield Curve Rates file for August 17, published after the market closes. Read the 30 Yr column against the 5.25% it carried on August 14, and read the 2 Yr column beside it, because the two have been moving apart.

2. The Federal Open Market Committee minutes for the July 28 and 29 meeting, scheduled for release on Wednesday. Read the section on the balance sheet and the discussion of longer-run inflation, which is where the reasoning behind the dissents will sit.

3. Treasury’s next quarterly refunding statement and the tentative auction schedule it publishes alongside it. Read the line specifying the size of the November 30-year offering, because the pace of long-dated supply is one of the four drivers Bloomberg names.

4. The Bureau of Labor Statistics Consumer Price Index release for August, due in September. Read the 12-month all-items change against July’s 3.4%, since five years above target is the reason the long end is pricing what it is pricing.