After previously recording the biggest two-day increase in a year and a half, the 10-year US Treasury yield has been in the midst of consolidation for the past two days. Overnight, the good news that allowed the bond market bulls to take a breather was that the largest 10-year US bond bid in history was carried out on Wednesday, and demand was strong at the end.

The US Treasury bid on Wednesday bids a record amount of 42 billion US dollars of 10-year treasury bonds. The final bid interest rate was 4.093%, which is nearly 1 basis point lower than the pre-issue interest rate before the bid. The bid multiplier was 2.56 times, the same as last month's 10-year US bond bid multiplier. The lower bid yield indicates that demand is stronger than traders expected.

It is worth mentioning that this is the first time in a year since the 10-year US bond bid was sold without a “tail end” situation. “Tail” means that the bid interest rate is higher than the pre-issue interest rate.

With the latest changes in the scale of the Ministry of Finance's bond bid announced last week, it advertises three of the seven types of notes and bonds, including two-year and five-year treasury bonds and the current 10-year treasury bonds, all of which will set the largest bid record in the February to April quarterly issuance.

This bid is also one of the three major testing days faced by the bond market this week. Previously, the yield of the $54 billion three-year treasury bond auction held on Tuesday was also lower than the pre-issue interest rate at the end of the bid, which is a positive sign. The US Treasury will also bid $25 billion of 30-year Treasury bonds on Thursday.

Vail Hartman, an American interest rate strategist at Bank of Montreal Capital Markets, said, “We are seeing good demand from non-tier 1 traders, and we are also seeing good indirect demand — this indicates good overseas demand.”

According to reports, the percentage of indirect bidders (including foreign central banks and other institutions) participating in the bidding this time rose to 70.1%, the highest since August 2023. However, the share of first-level traders with the obligation to buy all treasury bonds that fail to auction to prevent abortion was 13.0%, the lowest since August 2023.

Gene Tannuzzo, global head of fixed income at ColumbiaAthreadNeedle Investments, said, “Investors are seeing interest rates higher than they have been for much of the past decade, and they can lock in this.”

Zachary Griffiths, head of US investment level and macro strategy at CreditSights, pointed out, “This seems like a strong bid. Despite the increasing size of treasury bond auctions, demand for these maturities is still strong, and the 4% yield is historically attractive.”

Judging from market trends, as the market digested issuance details, US Treasury bonds stabilized overall overnight. By the end of the New York session, 2-year US Treasury yields rose 3.7 basis points to 4.443%, 5-year US Treasury yields rose 3.4 basis points to 4.078%, 10-year US Treasury yields rose 2.6 basis points to 4.126%, and 30-year US Treasury yields rose 2.3 basis points to 4.326%.

However, the US bond market as a whole is still in turmoil. The overnight tender sale of 10-year treasury bonds comes at a time when investors in the bond market have to deal with at least two challenges.

First, the outlook for monetary policy remains uncertain. The Federal Reserve has said that in the face of high inflation, interest rates may be cut this year, but the strong performance of the economy is challenging the market's expectations of when and how much interest rates will be cut.

The yield on US bonds of various maturities rose rapidly for two consecutive days last Friday and this Monday because the market expected the Federal Reserve to maintain high interest rates for a longer period of time, but since then, the bond market has basically been in a state of consolidation.

Another challenge is the growth in the size of the bond market, including the treasury bond market. Other things being equal, the additional supply of bonds will have an impact on the price of bonds.

Of course, the situation has been manageable since this year. The US Treasury Department said last week that it plans to continue to gradually increase the scale of treasury bonds until April, but considering the current estimated borrowing demand, it is not expected that the bid scale will be further increased in the next few quarters.

Judging from the news, the next major driver of the US bond market is expected to be the US Consumer Price Index (CPI) for January to be announced next Tuesday. According to CME's FedWatch tool, traders currently believe that the possibility that the Fed will cut interest rates in March is only 19%, lower than the 53% forecast a week ago, and the possibility of cutting interest rates in May is 64%.

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