Tensions on the U.S. government bond market rose again after Wednesday's 10-year bond auction ended in disappointment. Investors are growing increasingly cautious, and the result was a sharp jump in yields — a clear signal that demand for these bonds is fading.

🚨 10-Year Yield Spikes — and Fast

The auction turned out to be a nasty surprise. The yield on the 10-year Treasury surged to 4.24%, up three basis points from the previous day. In the tense atmosphere, it even spiked to 4.28% shortly before the auction ended, before pulling back slightly.

The auction results themselves did little to reassure the market. The new 10-year bond offered a yield of 4.255%, which was 1.1 basis points above its pre-auction trading level. This discrepancy — known as the “tail” — was the largest since last year’s failed 10-year auction, which saw a tail exceeding three basis points.

🔹 What does it mean? A large tail is seen as a red flag. It suggests that investors were reluctant to bid aggressively, and the auction had to offer a sweeter deal to attract buyers. As a result, the final coupon ended up at 4.25%, higher than the anticipated 4.125%.

📉 Weak Jobs Data Fuels Bets on Rate Cuts

Ironically, despite the poor auction, 10-year yields remain near their lowest levels since December. That’s largely due to growing market expectations that the Federal Reserve will be forced to cut interest rates.

July’s labor market data fell short of expectations, and figures for the two previous months were also revised downward. This shift in labor dynamics has encouraged more traders to bet on upcoming rate cuts.

Minneapolis Fed President Neel Kashkari said on Wednesday that the U.S. economy is slowing down and that “a rate cut may be appropriate in the near future.” He still expects two rate cuts by the end of 2025. Market participants are now pricing in nearly 60 basis points of easing by December, and the odds of a September rate cut have jumped to 85%.

📆 Bond Auctions Run on Schedule – Regardless of Sentiment

No matter what’s happening in the market, Treasury auctions follow a strict calendar. That means even in times of volatility or weak economic data, the issuance continues.

This week’s auction cycle wraps up on Thursday with a $25 billion offering of 30-year bonds. Interestingly, this issuance is expected to carry the lowest yield since March.

🔍 5-Year Bonds: Star of the Yield Curve – But For How Long?

While 10-year notes grabbed the headlines, many traders are eyeing the unusual behavior of 5-year bonds. Yields on these have hovered around 3.78%, which is remarkably low compared to other maturities — especially given that the Fed's rate is far from zero.

This suggests that the belly of the yield curve — the 5-year zone — may be significantly overpriced. Goldman Sachs strategists William Marshall and Bill Zu flagged that this segment looks “rich.”

Using the so-called butterfly spread method (a valuation technique comparing different maturities), they found the spread near -100 basis points — the lowest since early 2021.

🔹 What’s the takeaway? The move reflects market expectations of fast and deep rate cuts. But Marshall and Zu warn that such pricing is likely unsustainable.

📊 Summary: Bond Market Sends Warning Signs

🔹 10-year yields spiked due to a weak auction

🔹 Investor appetite for new issuances is fading

🔹 Weak job data fuels hopes for Fed rate cuts

🔹 5-year bonds appear overpriced — butterfly spread hits multi-year low

🔹 Thursday’s 30-year auction will be a key test of investor sentiment

Although 5-year bonds have outperformed so far this year, it might be a misleading signal. If sentiment shifts, this segment could face a sharp correction. Persistent inflation and the ballooning U.S. budget deficit continue to pressure long-dated yields like the 30-year.

#worldnews , #USGovernment , #economy , #bond , #market

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