US Treasury Auctions Post Strong Demand in April's Initial Issuance

US Treasury Auctions Attract Improved Demand Amid War Concerns

The first Treasury auctions of the month saw improved investor demand, alleviating concerns that foreigners were avoiding US debt amid the war in the Middle East. The auction of 10-year notes on Wednesday drew a yield only slightly higher than anticipated, indicating that demand nearly matched expectations. This comes after strong demand for a three-year note sale on Tuesday, which allayed concerns that the war is pushing up borrowing costs by sidelining buyers.

The gains for Treasuries, spurred by a temporary cease-fire agreement, trimmed the yield for the sale, which exceeded 10-year auction results since July. The US government is scheduled to hold a 30-year bond auction this week, the third of its seven major monthly debt sales.

However, Treasury Department data for the three auctions conducted during the first half of March revealed declines in the shares awarded to foreign accounts. Combined with Federal Reserve data showing a drop since mid-February in the amount of Treasury debt held in custody for foreign official and international accounts, it has advanced the theory that the war dented overseas demand for US debt, either directly or via the surge in oil prices it unleashed.

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The Treasury Department data shows that the shares of three- and 10-year debt auctions allotted to foreign and international accounts declined to the lowest levels since October. For the 30-year auction, the share was the lowest since July.

Auction allotment data for two-, five-, and seven-year notes, which drew higher-than-anticipated yields, a sign of weak demand, is slated to be released on Wednesday at 3 p.m. in Washington. However, twenty-year bonds, also sold during the second half of the month, fared better.

Reduced Treasury auction participation is an option for foreign buyers needing cash for currency intervention or to buy oil, or simply as a "cautionary move," according to John Briggs, head of US rates strategy at Natixis SA's US investment bank.

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The US relies less on foreign capital than in the past. The $9.3 trillion of Treasury securities held abroad in January accounted for about 30% of the $31 trillion market. In 2008, the share peaked at 56%, but the market was a fraction of its current size, and foreign holdings were under $3 trillion.

The slide in Treasuries held at the Fed on behalf of foreign and official accounts, amounting to about $66 billion since the war began, has reinforced speculation that overseas appetite for US debt has ebbed, possibly related to the oil price surge. This trend comports with Bank of New York Mellon Corp.'s custody-based data on institutional investment activity, according to John Velis, Americas macro strategist at BNY.

Cross-border holdings of Treasuries "have been falling almost inexorably since last April," when the US administration unveiled a tariffs agenda that upended global trade, Velis wrote in an April 7 report. Cash-like securities maturing in less than a year account for much of the drop, he said.

It's too early to tell if this shedding of USTs by foreign-based investors is the beginning of a secular decline in demand for USTs or merely a response to a higher inflationary environment and U.S. policy uncertainty, Velis added.

Sentiment Shift Elevated market volatility that deterred all types of investors, rather than foreigners in particular, may explain the poor results of last month's auctions, said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

However, a shift in Treasury market sentiment since yields reached their highest levels in several months at the end of March may translate into better results for this month's auctions, said Priya Misra, portfolio manager at JPMorgan Asset Management. Yields mostly ratcheted higher with oil prices in March, but have since retreated from those levels despite further gains for oil – until the cease-fire agreement – because of the potential for the energy price shock to hurt the US economy.