Turns out, demand from foreigners for Treasury securities at the auctions was just fine.

By Wolf Richter for WOLF STREET.

The 10-year Treasury yield dipped to 4.29% on Friday, where it had been in mid-March, despite the gyrations in between, and ended up below the Effective Federal Funds Rate (EFFR), currently at 4.33%, which the Fed targets with its policy rates (blue). Spikes followed by plunges, and vice versa, in an always edgy bond market, are part of the deal with the 10-year yield.

Foreigners kept buying Treasuries just fine.

When the 10-year Treasury yield snapped back 50 basis points in early April – after having plunged by 80 basis points from January through April 3 – rumors started flying that foreigners weren’t buying Treasury securities at the auctions anymore to punish the US for the imposition of tariffs, or whatever.

Those were fake rumors, as we now know from the Auction Allotment Report released by the Treasury Department this week. Foreigners kept buying the US debt just fine.

Foreigners bought 18.4% of the 10-year Treasury notes issued at the auction on April 9, following Liberation Day. That was a much larger portion than they’d bought in March (11.9%), a smaller portion than in February (20.6%), and a much larger portion than in January (10.5%), December (10.4%), and November (13.2%).

The portion of the 30-year Treasury bonds that foreigners bought at the auction on April 10, at 10.6%, was roughly similar to the portions in the prior five months – a little larger than in three, a little smaller than in two.

Zooming out, these gyrations barely register. In the grander scheme, the 10-year Treasury yield has been trading fairly closely to either side of the EFFR since late February, and has been in the same range for the past two years.

Given the current rates of inflation, and where they threaten to go, and given the risks with 10-year duration, the 10-year Treasury yield remains relatively low and presumably unattractive – and yet investors, including foreign investors, kept buying them, and this massive demand is why the 10-year yield is so low (and prices so high):

The 30-year Treasury yield has been trading at the upper end of its three-year range and closed on Friday at 4.74%. Back in October 2023, it had gone a hair over 5%, and today it is just 30 basis points below that multi-year high. 30-year duration poses even greater risk than 10-year duration.

The short end of the Treasury yields is being bracketed by the Fed’s policy rates and expectations of those policy rates within the remaining term of those securities.

The six-month Treasury yield has been glued to the bottom of the EFFR, indicating that this part of the market sees only a small chance of a rate cut this summer, following nicely what Federal Reserve governments have been saying for months: wait and see.

The yield curve’s sag in the middle deepens.

The chart below shows the yield curve of Treasury yields across the maturity spectrum, from 1 month to 30 years, on three key dates:

• Gold: January 10, 2025, just before the Fed officially pivoted to wait-and-see.
• Red: Today, April 25, 2025.
• Blue: September 16, 2024, just before the Fed’s monster rate cut.

Rate cuts have been on ice all year, and so short-term yields from 1-6 months haven’t moved much and remain near the EFFR.

Longer-term yields have snapped back from the recent lows, but are still lower than on January 10.

The yields from 1-7 years have dropped more than long-term yields, and with short-term yields held in place by expectations of the Fed’s policy rates, the sag in the middle deepened. That part of the yield curve has completely re-un-inverted since January.

Today, only the 30-year yield is higher than short-term yields. The 10-year yield is about level with the 1-3 months yields.

The 2-year yield dropped by 66 basis points since January 10, the 3-year yield by 72 basis points, and the 5-year yield by 69 basis points – all three of them far more than the 10-year yield (by 48 basis points) and the 30-year yield (by 22 basis points). And these much bigger drops in the middle caused the middle to sag so deeply.

Bessent’s yield bash-down.

Treasury Secretary Bessent tried hard to bash down the 10-year yield because it influences long-term funding costs in the economy and matters to the economy, and it worked and Wall Street loved it. But then the yield plunged too far, became unattractive at less than 4%, and demand withered at that yield, which caused the yield to snap back to where demand was, now at around 4.3%.

If Bessent didn’t try to bash down the 10-year yield, but let it ride to wherever the market saw fit, it would likely be quite a bit higher, given the current inflation dynamics, and given the risks of 10-year duration.

There will always be enough demand for Treasury securities because yield solves all demand problems: a higher yield makes securities more attractive and brings out the demand. And currently, demand is huge for 10-year debt, as we can tell from the relatively low yield of around 4.3%.

Bessent’s dollar bash-down.

Bessent also bashed down the dollar, and it worked too. A weaker dollar would boost the economy by favoring exports (a positive in GDP) over imports (a negative in GDP). Bashing down long-term yields and the dollar was the explicit two-pronged strategy by the White House to goose the economy.

But unlike the 10-year Treasury yield, the dollar has snapped back only mildly.

The dollar index [DXY], representing a basket of six currencies dominated by the euro and yen, dropped from 110 in January to 99.28 on April 20. But that drop was a lot smaller than the drop in 2022, and a lot smaller than prior drops, after which the dollar always eventually bounced back.

On Friday, the DXY closed at 99.60, where it had been on April 13, after the brief dip below the range and the bounce back into the range.

At the current level of the DXY at 100, the dollar is in solid territory. There were years when the DXY was below 80. And at the current level of about 100, the dollar is still relatively high compared to where it had been in the prior 50 years.

But at a 110, as in January, the dollar was considered too strong, causing US economic damage by favoring imports (a negative for GDP) and making exports (a positive for GDP) more difficult, which was why Bessent set out to bash it down from 110.

The DXY was set at 100 when it began in 1973, after the Bretton Woods system of monetary management had been scuttled.

Other dollar indices include the currencies of other large trading partners of the US, such as Mexico, China, India, Brazil, etc., and many of these currencies have constantly declined against the USD, and the USD looks a lot stronger in indexes with soft currencies included. For example, the Federal Reserve’s trade-weighted Broad Dollar Index has zigzagged higher for the past 20 years, and hit an all-time high in January, before dipping just a little.

But the DXY measures the USD only against other hard currencies.

Mortgage rates are higher in relationship to the 10-year Treasury yield than they were most of the time over the past 50 years. There are reasons. Here are my thoughts: The Spread between 10-Year Treasury Yield & Mortgage Rates Is Historically Wide and Widened Further

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