U.S. Treasury buyers "strike" begins: Overseas demand for 2-year U.S. Treasuries hits a two-year low

On Tuesday local time, the U.S. Treasury auctioned $69 billion in two-year Treasury bonds, with the final winning yield at 3.795%, the lowest level since September of last year, down from 3.984% on March 25.

The winning yield in this auction was 0.6 basis points higher than the pre-issue yield of 3.789%, marking the first instance since January this year where the tail spread reflecting weak demand appeared, and it is also the largest tail spread since October of last year.

The bid-to-cover ratio for this auction was 2.52, the lowest since October of last year, and below the average of 2.64 for the past six auctions, with the previous auction at 2.66.

The market is most concerned about the internal data of the auction. Unlike the significant decrease in "direct bidders" in recent auctions of 3-year, 10-year, and 30-year U.S. Treasury bonds, the "direct bidders" in this two-year Treasury auction performed strongly, capturing 30.1% of the share, one of the higher levels historically.

However, the issue is that the increase in direct bidding came at the expense of a significant decrease in "indirect bidders." The indirect bidding was only 56.2%, the lowest since the peak of the Silicon Valley Bank crisis in March 2023.

Direct bidders include hedge funds, pension funds, mutual funds, insurance companies, banks, government agencies, and individuals, serving as an indicator of domestic demand in the U.S. Indirect bidders are typically foreign central banks and other institutions participating through primary dealers or brokers, serving as an indicator of overseas demand.

As the "backstop" for all unsold supply, primary dealers received a share of 13.7% in this round, up from 10.7% last month, and slightly above the recent average of 11.6%, although it is not particularly extreme.

Financial blog Zerohedge commented that the performance of this two-year Treasury auction was mediocre. If it weren't for the direct bidders stepping in to fill the gap left by foreign buyers, the results could have been much worse.

Zerohedge pointed out:

While demand from foreign buyers for U.S. Treasuries was strong two weeks ago, it has now collapsed. If it drops another 10%-20%, the Federal Reserve may have no choice but to restart quantitative easing (QE) to fulfill its role as the last buyer of U.S. Treasuries, providing market support.

The market will closely monitor the remaining U.S. Treasury auctions this week. Unlike two weeks ago when the focus was on "direct bidding," the core issue now is whether investors outside the U.S. have truly stopped buying America's trillion-dollar debt. If so, the Fed's QE will become the only option