Treasury’s record-size $64 billion sale of 5-year notes gets so-so demand, testing appetite for more supply

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Treasury’s biggest-ever auction of 5-year notes was met with somewhat middling results, acting as a test of the market’s appetite for a continuing supply of government debt.

The 1 p.m. Eastern time sale resulted in indirect bidders taking 63.5%, or below the norm, and a bid-to-cover ratio that came in around the average seen over the last couple of months, according to Lawrence Gillum, the Charlotte, North Carolina-based chief fixed-income strategist for broker-dealer for LPL Financial.

Treasury auctions have gained greater scrutiny recently because of questions around whether investors would keep stepping up to buy government debt, regardless of the U.S. fiscal outlook. Monday afternoon’s $64 billion sale of 5-year notes followed an earlier $63 billion auction of 2-year notes, which produced decent demand, Gillum said via phone.

Treasury yields finished higher on the day, with the 2-year rate
BX:TMUBMUSD02Y
reaching a three-month high of 4.738% and the 5-year yield hitting 4.316%.

Future 5-year auctions are about to get bigger, growing to $67 billion in March and an estimated $70 billion in the second quarter, according to Gillum. “If markets can’t digest these amounts, it could get worse as these auction sizes increase,” he said.

Meanwhile, Monday morning’s sale of 2-year notes was the largest for that maturity since 2016, and the sizes of coming sales for that part of the Treasury market should keep growing over the next two months, according to the strategist.

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