The US Treasury market remained under pressure throughout the week. Following a lackluster 5-year note auction, the Treasury's $44 billion 7-year note sale on Thursday also drew weak demand, with the high yield rising to 5.085%, the highest level on record for that maturity.
The auction's high yield came in 0.7 basis points above the "when-issued" yield, while the share allocated to overseas investors dropped to 57.2%, the lowest since November 2025. After the results were released, the secondary Treasury market continued to weaken, with the 10-year yield breaking above 5.2% for the first time since 2007.
Meanwhile, the Treasury's second expanded buyback operation on Thursday also fell short of its $6 billion maximum, accepting only $4.078 billion in offers, equivalent to 68% of the cap and below the roughly 86% seen at the first expanded buyback on September 11. The liquidity support provided to the market came in below expectations.
Pressure in the fixed-income market also spread to municipal bonds. The benchmark 30-year muni yield rose to 5.07%, while the 10-year muni yield climbed to 4.01%, both reaching their highest levels since 2011.
US Treasuries were sold off on Thursday, with the 30-year yield rising as much as 9 basis points to 5.49%, the highest since 2004.
Strategists at JPMorgan and KKR believe Treasury yields still have room to climb further, as risks from energy-driven inflation, heavy government borrowing, and further central bank monetary tightening continue to simmer.
7-Year Treasury Auction Sees Weak Demand, Yield Hits Record High
The US Treasury issued $44 billion in 7-year notes on Thursday, with a final high yield of 5.085%, up from 4.512% at the auction a month earlier and the highest on record for that maturity.
The auction yield came in 0.7 basis points above the "when-issued" yield of 5.078%, marking the largest tail since March of this year. A wider tail means the final traded yield exceeded the pre-auction market level, indicating investors demanded higher yields to absorb the supply.
Internal demand at the auction also weakened. The share allocated to overseas investors fell to 57.2% from 60.8% previously, the lowest since November 2025; the share taken by direct bidders rose to 30.3%, a historically elevated level. Primary dealers ultimately absorbed 12.5% of the issuance, roughly in line with recent averages.
While the auction's performance was not as weak as the prior day's 5-year note sale, it still failed to improve secondary market sentiment. After the auction, the 10-year Treasury yield moved back toward its intraday high, last around 5.15%.
Treasury's Expanded Buyback Falls Short Again, Actual Size Just 68% of Cap
The Treasury on Thursday also conducted its second expanded "liquidity support" buyback operation, targeting 20-year to 30-year nominal coupon Treasuries, with a maximum buyback size of $6 billion.
The operation received $10.489 billion in offers, but the Treasury ultimately accepted only $4.078 billion, equivalent to 68% of the maximum buyback size and notably below the roughly 86% execution ratio at the first expanded buyback on September 11.
The Treasury accepted only 12 of 35 eligible bonds. The two largest transactions were $1.5 billion of Treasuries maturing in February 2048 with a 3.000% coupon, and $1.5 billion of Treasuries maturing in November 2051 with a 1.875% coupon.
The accepted offers corresponded to yields of roughly 5.54% to 5.56% on bonds maturing between 2047 and 2051, about 40 to 45 basis points above the 5.10% to 5.16% 10-year Treasury yield at the time.
The Treasury did not broadly accept low-price offers that deviated significantly from the fair yield curve. All 12 accepted bonds were close to the fitted yield curve, meaning the Treasury did not expand the buyback size by clearly raising buyback prices.
The buyback falling below the $6 billion cap also means the "liquidity support" the Treasury provided was less than the market might have previously expected.
30-Year Municipal Yields Break Above 5%, Highest Since 2011
As the Treasury market came under pressure, the US municipal bond market also saw pronounced selling.
As of 3 p.m. New York time on Thursday, the benchmark 30-year muni yield rose 11 basis points to 5.07%, breaking through the 5% threshold and reaching its highest level since at least 2011. The 10-year muni yield climbed 14 basis points to 4.01%, also the highest since at least 2011.
Inflation concerns and expectations of further Federal Reserve rate hikes are battering the municipal bond market. Through Wednesday, munis had fallen 2.8% month-to-date in September, on track for their worst monthly performance since 2023.
Data compiled by Bloomberg show that the volume of municipal bonds for which investment managers submitted sell offers rose to about $3.4 billion on Wednesday, the highest since the violent market swings in the early days of the pandemic in 2020.
A team led by JPMorgan strategist Peter DeGroot said the municipal bond market is showing signs of a negative feedback loop, in which poor performance leads to fund outflows, and those outflows further weigh on performance. This situation may persist until the rate environment stabilizes.
High Municipal Yields Begin to Attract Some Institutional Money
However, after municipal yields rose above 5%, they also began to attract some institutional investors.
Mark Paris, chief investment officer for municipal bonds at Invesco, said market participants report that some insurance companies, banks, and other crossover investors are entering the market, and "the 5% threshold matters to them."
At the same time, future municipal bond supply may slow. As of Thursday, about $15.9 billion of municipal bonds were expected to come to market for pricing over the next 30 days.
Ryan Ciavarelli, senior vice president at Belle Haven Investments, said that with order books performing poorly, underwriters will be more cautious about bringing new debt to market, which could lead some issuers to pause sales.
He said that as long as new bond pricing remains attractive, there is still demand in the market, but some issuers may choose to hold off to see how the market develops.
Comments