US Treasury debt prices took a spill on Wednesday as investors worried foreign central bank demand for US assets might be fading. Such fears resurfaced after two consecutive quarterly refunding auctions were met with only meager interest from indirect bidders, which include customers of primary dealers as well as offshore central banks.
Asian central banks own over a quarter of marketable Treasury securities, so any inkling that their desire for US government bonds is waning sends ripples of anxiety through the market.
"Maybe we're finally getting to the point where the foreigners are demanding really high compensation for our budget and current account deficits," said Mary Ann Hurley, a senior Treasury market trader at D.A. Davidson & Co.
That possibility helped knock benchmark 10-year notes 21/32 lower for a yield of 4.65 percent, up from 4.56 percent on Tuesday and ever closer to a seven-month high of 4.70 percent hit last week.
Two-year notes dropped 4/32 to yield 4.49 percent, against 4.42 percent. They briefly hit 4.50 percent, their highest in nearly five years.
In the latest refunding flop, the $13 billion in new five-year notes were sold at a high yield of 4.525 percent and received 2.61 times the number of bids per dollar of debt on offer.
That was better than a recent average of 2.51, but those results were overshadowed by the surprisingly scant foreign participation.
Indirect bidders took home a tiny $2.69 billion, or 20.7 percent of the new notes, far below an average 39.2 percent seen in the prior 10 auctions of the same maturity in 2005.
The market had already traded lower for much of the session as investors looked to cheapen bonds ahead of the second helping of the refunding. But the move appeared to backfire as dealers were left with $8.85 billion, or a burdensome 68.1 percent of the deal.
"This puts the onus on 10s to serve as the 'saving' leg to the refunding," said David Ader, government bond strategist at RBS Greenwich.
The third and final instalment of the Treasury refunding comes on Thursday, with the sale of $13 billion in 10-year notes.
Analysts said the risk for traders was that any attempt to cheapen the notes in advance of the 10-year sale would force a breach of key technical levels and exacerbate the market's downturn.
Foreign investors had already held back at Tuesday's three-year sale, with post-auction data showing indirect bidders had been abnormally unaggressive about securing their bids. Analysts were now worried that they would hold back for a third straight day.