US Treasury Market Under Renewed Pressure
TREE NEWS reports: The US Treasury market extended its selloff on Thursday as a closely watched 7-year note auction drew weak demand, a Treasury buyback operation fell short of its maximum size, and municipal bond yields surged to their highest levels in more than a decade.
The Treasury sold $44 billion of 7-year notes at a high yield of 5.085%, the highest on record for that maturity and up sharply from 4.512% at last month’s auction. The auction tailed the when-issued yield by 0.7 basis points, the largest tail since March, signaling that investors demanded a premium to absorb the supply.
Indirect bidders, a proxy for foreign demand, were allotted 57.2%, down from 60.8% previously and the lowest since November 2025. Direct bidders took 30.3%, near historic highs, while primary dealers absorbed 12.5%, roughly in line with recent averages.
Buyback Operation Misses Target
The Treasury also conducted its second expanded liquidity-support buyback, targeting 20- to 30-year nominal coupon bonds with a maximum size of $6 billion. It received $10.489 billion in offers but accepted only $4.078 billion, or 68% of the cap, well below the roughly 86% execution rate at the first expanded buyback on September 11.
Only 12 of 35 eligible bonds were accepted. The two largest operations were $1.5 billion of the 3.000% February 2048s and $1.5 billion of the 1.875% November 2051s. Accepted bonds yielded roughly 5.54% to 5.56%, about 40 to 45 basis points above the 5.10% to 5.16% range for 10-year notes at the time.
The Treasury declined to accept lowball offers that deviated materially from the fitted yield curve, meaning it did not raise prices aggressively to hit the cap. The smaller-than-expected operation suggests less liquidity support than some market participants had anticipated.
Muni Market Rout Spreads
Stress in fixed income spread to municipal bonds. The benchmark 30-year muni yield rose 11 basis points to 5.07%, breaking above 5% for the first time since at least 2011. The 10-year muni yield climbed 14 basis points to 4.01%, also a multi-year high.
Municipal bonds have fallen 2.8% month-to-date through Wednesday, on track for the worst monthly performance since 2023. The volume of muni bonds submitted for sale by investment managers rose to about $3.4 billion on Wednesday, the highest since the early-pandemic turmoil of 2020.
Strategists at JPMorgan, led by Peter DeGroot, warned of a negative feedback loop in which poor performance drives outflows, which in turn weighs further on prices. That dynamic may persist until the rate environment stabilizes.
Still, yields above 5% are beginning to attract institutional buyers. Mark Paris, chief investment officer for municipal bonds at Invesco, said insurers, banks and crossover investors are stepping in, adding that the 5% threshold is significant for them.
New issuance may also slow. About $15.9 billion of munis are expected to price over the next 30 days. Ryan Ciavarelli, senior vice president at Belle Haven Investments, said underwriters will be more cautious about bringing deals when order books are weak, potentially prompting some issuers to postpone.
Market Implications
The broad message is that the term premium is rising across US fixed income. A 10-year Treasury yield above 5.2% and a 30-year yield near 5.49%—the highest since 2004—reflect concerns about energy-driven inflation, heavy government borrowing and the risk of further central bank tightening.
Rising long-end yields typically pressure equity valuations, particularly for long-duration growth stocks, while supporting the dollar and weighing on gold and other non-yielding assets. Crypto assets, which have traded as risk proxies, may face headwinds if real yields continue to climb.
Credit markets could also feel the strain. Higher benchmark yields raise borrowing costs for corporates and municipalities, potentially slowing issuance and refinancing activity.
Key Takeaways for Investors
- Duration risk is back. Long-dated Treasuries and munis are selling off hard; investors should reassess duration exposure.
- Watch the tail. Auction tails and weak indirect demand signal that foreign buyers are retreating, which could keep yields elevated.
- Muni opportunity? Yields above 5% are drawing insurers and banks, but the negative feedback loop may not be over.
- Cross-asset implications. Higher real yields tend to weigh on equities and crypto while supporting the dollar.
