Tuesday saw what really could be called a very good auction, a reversal of recent trends. $13 billion in 20-year bonds was sold. The high interest rate was 4.93%, a big drop from last month’s 5.12% and lower than expected. Overall demand was also well above recent averages, with a ratio of bids to amount sold of 2.75, and foreign demand was also above average, while the primary dealers ended up with a very small portion. The apparent end of the Iran conflict, for now, and lower oil pricess are the obvious explanation for the turnabout.
There was also one TIPS sale this week, the five-year inflation-protected bond. The real yield, after the inflation-protection piece, was 1.96%. This was the first auction after the Federal Reserve kept its interest rate steady but indicated rate increases were possible if inflation doesn’t recede. Prior real yields had been around 1.8%, so this was a bit of a jump up and the real yields have jumped substantially since the last auctions a couple of months ago. Since the notes are inflation-protected, the jump has to be related more to concerns about the debt pile. Demand was good, which you would expect at this higher rate, but the inverse is also true, the debt would not have sold without the much higher real yield.
Meanwhile, retail sales, the biggest piece of the economy, were up more than expected. Home sales and construction were also strong. And of course the stock market continues to boom.
