US Treasury Auctions $18 Billion, 30-Year Bonds at Top of Hour

By on September 13, 2022 0

The US Treasury auctioned 3- and 10-year notes yesterday with lukewarm demand. International investors were to blame. Perhaps they were concerned about the weakening dollar.

Today, the dollar is back on the bullish path and interest rates are also higher with the 30-year up about 3 basis points at 3.542%.

Admittedly, the sharp rise in rates is in the short end with the 2-year up 18.6 basis points to 3.76%. This makes the auction a key barometer for the long term. Is 3.542% or thereabouts, a sufficient return given inflation

Inflation

Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general price level where a given currency is effectively buying less than it has in previous periods. In terms of valuation of strength or currencies, and by extension foreign currencies, inflation or its measures are extremely influential. Inflation stems from the global creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (measured with GDP). This thus generates demand pressure on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare the different purchasing power of each country according to the general level of prices. By doing so, it helps to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates in the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on the exchange. Conversely, too low inflation (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the foreign exchange market.

Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general price level where a given currency is effectively buying less than it has in previous periods. In terms of valuation of strength or currencies, and by extension foreign currencies, inflation or its measures are extremely influential. Inflation stems from the global creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (measured with GDP). This thus generates demand pressure on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare the different purchasing power of each country according to the general level of prices. By doing so, it helps to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates in the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on the exchange. Conversely, too low inflation (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the foreign exchange market.
Read this term is still high, and expectations that the Fed is likely looking at more than 4% as a final rate and have promised to keep rates high for an extended period thereafter to stimulate inflation?

The six-month component averages for the 30-year auction show:

  • Bid to cover 2.37X. Bid to cover is a measure of the number of bids received to cover the $18 billion auction amount
  • Dealers, 12.8%. Dealers typically take the balance of the auction once domestic and international bids have been fulfilled
  • Leads a measure of domestic demand 17.3%
  • Indirect a measure of international demand 69.9%
  • Tail at WI level at auction -0.7 basis points. At the time of the auction, the issue yield (or WI yield) is noted and compared to the high yield yield the auction is sold. A tail of -0.7 basis points means the high yield was -0.7 basis points below the WI yield. This is a sign of strong investor demand. Conversely, a positive tail indicates lower investor demand.

Traders will measure the success or failure of the auction against 6-month averages.

Yesterday’s 3 and 10 year auctions had positive tails. The bid to cover was below average. The indirect % was well below the 6-month average.