Weak Demand Contributes to Subpar Treasury Sale in Latest Auction

US Treasury Auctions: Disappointing Demand Amid Geopolitical Uncertainty

$44 billion seven-year Treasury auction saw soft demand on March 26, capping a week of disappointing auctions. The weak demand is attributed to investor concerns about inflation expectations due to the ongoing Middle East war.

Investor Caution and Risk Aversion

Investors have been dumping Treasuries in recent weeks, fearful that the spike in oil prices will lift inflation expectations. The auction of two-year and five-year notes earlier in the week also reflected investor caution in allocating assets, even in widely viewed safe havens like Treasuries.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Seven-Year Yields Rise

Seven-year yields have jumped 36 basis points since the last auction in late February, as geopolitical risks reverberated across the curve. The seven-year note auction numbers were generally weak, with primary dealers taking in 12.4% of the total new issue, the largest takedown since November.

Bid-to-Cover Ratio Lowest Since September

The bid-to-cover ratio, a measure of investor demand, was 2.43, a level not seen since September. This was also lower than the 2.46 average of the last six auctions. The low bid-to-cover ratio suggests that there was low appetite for the latest note, forcing primary dealers to absorb the remaining supply.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

US Seven-Year Treasuries Extend Selloff

US seven-year Treasuries extended their selloff following the auction, further pushing their yields higher. The yield was last up 10.5 basis points at 4.252%. The auction cleared at 4.255%, higher by nearly a basis point than the expected rate forecast before the bid deadline.

Seasonal Weakness Not Unexpected

Analysts noted that March has been seasonally soft for seven-year supply, with 63% of auctions coming in weaker than expected since 2010. The poor demand for auctions this week is a function of worries about inflation due to Middle East uncertainty.