Sold $54B of 10-Year Treasury notes at 4.18% to replace $25B of maturing 1.73% 10-year notes, pushing up amount outstanding by $29B.
By Wolf Richter for WOLF STREET.
The US government sold $701 billion of Treasury securities this week, spread over nine auctions, including 10-year Treasury notes and 30-year Treasury bonds.
Of these auction sales, $160 billion were notes and bonds. The yield at the 10-year Treasury auction (4.177%) was a hair higher than at the 10-year auction a month ago (4.173%). The yield at the 30-year auction (4.750%) was lower than a month ago (4.825%). The yield of the 3-year note fell by over 9 basis points to 3.518%, below most of the T-bill yields that sold this week.
| Notes & Bonds | Auction date | Billion $ | Auction yield |
| Notes 3-year | Feb-10 | 74 | 3.518% |
| Notes 10-year | Feb-11 | 54 | 4.177% |
| Bonds 30-year | Feb-12 | 32 | 4.750% |
| Notes & bonds | 160 |
And $541 billion were Treasury bills with maturities from 4 weeks to 26 weeks, most of them to replace maturing T-bills.
Yields at five of the T-bill auctions, with maturities from 4 weeks to 17 weeks rose by 3 to 5 basis points compared to the same week a month ago. Only the 26-week bills were sold at a lower yield, down by 8 basis points compared to a month ago.
| Type | Auction date | Billion $ | Auction yield |
| Bills 6-week | Feb-10 | 95 | 3.635% |
| Bills 13-week | Feb-09 | 94 | 3.600% |
| Bills 17-week | Feb-11 | 69 | 3.595% |
| Bills 26-week | Feb-09 | 81 | 3.500% |
| Bills 4-week | Feb-12 | 105 | 3.630% |
| Bills 8-week | Feb-12 | 95 | 3.630% |
| Bills | 541 |
The yield of the 13-week Treasury bills, at 3.60%, was up from 3.56% a month ago, indicating that the market no longer expects a rate cut within the 3-month window of these securities.
In the secondary market, the three-month yield, at 3.68% on Friday at the close, was up just a hair from a month ago (3.67%) and was higher than the Effective Federal Funds Rate (EFFR) which the Fed targets with its policy rates (blue line):
But the 26-week Treasury yield at the auction this week dropped to 3.50%, lower than a month ago (3.58%), and below the EFFR, indicating that the market sees a chance of a rate cut within its 6-month window.
In the secondary market, the 6-month yield closed on Friday at 3.61%, also lower than the EFFR.
The Fed’s rate cuts have pushed down yields at T-bill auctions, but yields at note and bond auctions are determined by the yo-yo of the bond market and reflect the bond market’s aspirations, and the views of the future – especially of inflation and supply of Treasuries to fund the ballooning deficits.
The 10-year Treasury notes sold on Wednesday at a yield of 4.177%, and in the secondary market that day, the 10-year yield closed at 4.18%.
But in the two days since the auction, the 10-year yield dropped by 13 basis points in the secondary market, to close at 4.05% on Friday, the lowest since late November. Since the beginning of February, it has dropped by 24 basis points.
Lower bond yields mean higher bond prices, and leveraged bond traders make a lot of money when prices rise and yields fall. On Wednesday, yields had risen on news of fairly strong hiring in the private sector in January. But on Thursday, the market walked that back, and on Friday, there was lots of stuff floating around in the headlines about a “soft” CPI report, and that’s all it took to push up prices of bonds and notes, and push down their yields. Market yo-yo. Bounce next?
10-year notes outstanding increased by $29 billion this week. Bond math, as deficits balloon, is relentlessly brutal. The $54 billion of 10-year notes sold at the auction this week at 4.177% replaced $25 billion in 10-year notes sold at auction in February 2016 at 1.73%, maturing on Sunday. And thereby the total amount of 10-year notes outstanding rose by $29 billion.
At the 30-year Treasury auction on Thursday, strong demand pushed down the auction yield to 4.75%.
In the secondary market after the auction on Thursday, the 30-year yield declined further to 4.72%, and on Friday eased to 4.70%, down 12 basis points in two days.
But the yield is still above the middle of its two-year trading range.
Jawboning down long-term yields.
The Treasury Department has said that it would use increased T-bill issuance to fund the deficit, rather than increased issuance of notes and bonds. It has said this to take some upward pressure off long-term yields, as the bond market is concerned about supply in the future of notes and bonds it has to absorb that might require higher yields to bring in new buyers.
But the Treasury Department was just jawboning, and the market loved to hear it.
The ratio of T-bills outstanding to total Treasuries held by the public has remained roughly unchanged for the past four months, and at the end of January was 21.7%, up a hair from December, but down a hair from October and November, and lower than in 2024.
Turns out that the issuance of notes and bonds has increased by about the same rate as T-bill issuance has increased.
The mechanism for it is the relentlessly brutal bond math. This week, the $54 billion of 10-year notes sold at auction replaced the $25 billion in notes sold at auction 10 years ago, that maturing this Sunday, adding $54 billion and subtracting $25 billion, thereby increasing the total 10-year notes outstanding by $29 billion.
This process continues every month with every note and bond auction. And 20-year bonds were re-introduced in 2020, after having been eliminated in 1986. There are no maturing 20-year bonds, and the new issuance doesn’t replace anything. It just adds to the bonds outstanding. Even if the Treasury department doesn’t further increase the size of the note and bond auction, the total outstanding will increase relentlessly.
So the shift to a larger share of T-bills hasn’t actually occurred yet since note and bond issuance is far larger than the maturing notes and bonds they replace, thereby pushing up the total amount of notes and bonds outstanding.
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