Treasury's 5.30% auction marks August's 10-year buyers down 4.68 cents on the dollar

Because this sale was a reopening, the loss on earlier buyers can be priced to the cent. The notes carry the same 4.625% coupon and August 15, 2036 maturity as the batch first auctioned on August 12 ^[8]. Only the price moved, from 99.54 cents on the dollar in August to 94.86 cents this time ^[10][9]. The drop is 4.68 cents, about 4.7% of what the August buyers paid ^[15]. Two months of a 4.625% coupon is worth roughly 0.77 cents, so even after the interest they have collected, those holders are down about 3.9 cents per dollar of face value ^[16]. On every $1 billion of August paper, the price loss alone is about $46.8 million ^[17]. Wolf Richter, who covered the sale for Wolf Street, wrote: "That's the bond bloodbath of rising yields: they're appealing to buyers but crush existing holders." ^[14]

The seller pays as well. Selling $39 billion of face value at 94.86 raises about $37.0 billion before accrued interest ^[18], and the Treasury still owes the full $39 billion in 2036 ^[8]. At August's price the same face value would have brought in about $38.8 billion ^[19]. The gap of roughly $1.8 billion is interest the government pays as a lump at maturity ^[19]. "Yield creates demand but is not free for the debtor," Richter wrote ^[12].

The climb is steep: 4.58% three months ago, 4.683% in August, 4.834% on September 9 ^[6], and 5.30% now, a rise of 46.6 basis points in a month and 72 in three ^[20]. Where the rise happened matters more than its size. The 10-year traded as high as 5.36% on auction morning on expectations of an ugly sale, eased to 5.32% before the auction and fell to 5.28% afterward ^[5]. The auction stopped 1.7 basis points through the when-issued yield of 5.317%, the biggest stop-through since April last year ^[3]. Bids totaled $108.07 billion for $39 billion of notes ^[7]. Bidders paid more than the when-issued market implied, and the damage to August holders had been done in trading before the sale opened ^[3][5].

Richter's own view is that the level is still too low. "A 5.30% 10-year yield at the current rates of inflation and the fiscal nightmare Congress and the White House keep concocting is still on the low side," he wrote ^[13]. If he is right, this week's buyers are next in line for mark-downs. A second question is who bought. Indirect bidders took 80.3%, or $31.1 billion, against a six-month average of 74%, and Richter takes the share as a sign of substantial foreign interest; the results, though, lump foreign central banks together with every other indirect bidder ^[4]. Or the post-auction drop to 5.28% keeps going and August holders win back part of their 4.68 cents ^[5][15].

I think the auction showed demand that is sensitive to price and present in size, at a yield the secondary market had already reached ^[7][5]. Richter put the first half plainly: "Creating demand is what yield does, that's its job." ^[11] The counter-case is his too, that 5.30% has further to climb before it pays holders for inflation and the deficit ^[13]. A 10-year sale that clears above its when-issued yield with a bid-to-cover under the 2.54 six-month average would prove the view wrong, because it would mean buyers stepping back at the market price ^[7].