The bond market has come to grips with these 5%-plus yields and is settling in.

By Wolf Richter for WOLF STREET.</h4

At the 20-year Treasury bond auction today, it took a yield of 5.469% to attract enough demand to sell all of the $13 billion of bonds, the highest yield since the 20-year bond was re-introduced in May 2020. That’s what investors demanded to be compensated for the additional risks they were seeing. The function of yield is to create enough demand. And it did.

And it was the highest auction yield since 1986 with an asterisk: Issuance of the 20-year bond had been discontinued in 1986. At the last auction, in January 1986, the 20-year Treasury bonds sold at a yield of 9.45%. Yeah, those were the times.

At the 20-year auction last month, the bond had sold at a yield of 5.420%, in August, at 5.204%, in July, at 5.163%. You get the drift.

Exactly three years ago, at the auction in October 2023, the 20-year bond had sold at a yield of 5.245%, up from 1.22% at its first auction in May 2020, but that had been too far, too fast, and the bond market took a massive breather, during which the 20-year yield plunged by about 130 basis points in 11 months. Now the bond market has come to grips with those yields.

Today’s auction may have been one of the last 20-year auctions. As has been typical for the 20-year yield: it’s higher than the 30-year yield. The spread is currently about 4 or 5 basis points. In 2020, after the reintroduction, the spread was about 20 basis points.

This makes the 20-year bond relatively more expensive for the government to sell than the 30-year bond.

The 20-year bond is lacking interest from institutional investors, including foreign central banks. It’s the unloved bond. So the auctions are small (just $13 billion, compared to $39 billion for the 30-year auctions), and the bond is new, so there is thin liquidity in the secondary market, which makes it harder to sell them, which triggers bigger haircuts for sellers.

But for retail investors who are building a Treasury portfolio and are planning to hold to maturity, the unloved 20-year bond is more attractive than 30-year bonds: a higher yield on less duration risk.

The same lack of interest from institutional investors and higher yields had doomed the 20-year bond in 1986.

Rumors or discussions have recently been circling that Bessent is considering discontinuing the issuance of the 20-year bond once again. With this on-again, off-again approach, and even discussions about it, it’s hard to build up long-term institutional interest in the bond.

The 0.9 basis point tail: When a bond auction is announced, the new “when-issued” bond starts trading so that price discovery begins before the auction. The when-issued bond traded at a yield of 5.460%, which turned out to be 0.9 basis points lower than the auction yield of 5.469%. This 0.9 basis point “tail” indicates that demand at the auction was weaker than the market had expected.

At the auction a month ago, the tail was 2.0 basis points, as demand at the auction was substantially weaker than the market had expected, and the auction was termed “ugly” and “sloppy” because of it. So this 0.9 basis point tail wasn’t as bad as the tail a month ago. But the yield was higher.

The Bid-to-Cover Ratio was 2.73, with $35.48 billion in bids and $13.00 billion accepted, the highest bid-to-cover ratio in months (2.57 in September, 2.53 in August, and 2.64 in July).

Indirect Bidders purchased 58.2% of the $13 billion, below the six-month average but higher than at the last auction (52.3%, which had been the worst so far in the six-year existence of the modern 20-year bond auction).

Indirect bidders are buyers that placed a competitive bid through a primary dealer or direct submitter, and include foreign central banks that bid at the auction through the NY Fed. The auction results don’t distinguish between foreign bidders and other indirect bidders.

Treasury retail bidders purchased $30.8 billion of the bonds.

It was the second “reopening” auction of the same bond that had originally been sold at the auction in August, with the same CUSIP number (912810UX4) and the same coupon interest rate (5.125%), and the same maturity date (August 15, 2046).

The difference was the price, which was established through the auction. Today’s auction price was 95.85 cents on the dollar. The lower price with the same coupon interest produced the yield to maturity of 5.47%.

Each of the three auctions sold $13 billion of this same bond, so there are now $39 billion outstanding. The 20-year auction in November will start a new bond, with reopening auctions in December and January – if Bessent doesn’t shelve the 20-year auctions before then.

The long-used practice of selling the same issue over three auctions increases the amount of the same bond outstanding, which improves liquidity and trading in the secondary market. All 10-year, 20-year, and 30-year Treasury auctions, all TIPS auctions, and the 2-year Floating Rate Note auctions have these reopening cycles.

In the secondary market, the 20-year Treasury yield barely moved and ended the day unchanged at 5.47%. Earlier this month, the 20-year yield had spiked briefly to 5.70%, and all of those yields were the highest since 2004.

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