The U.S. Treasury's 7-year bond auction was disappointing, with the issue still lying in overseas demand

On Thursday local time, the U.S. Treasury auctioned $44 billion in seven-year bonds, with multiple indicators showing weak demand, particularly concerns about overseas demand resurfacing.

The final winning yield for this auction was 4.123%, down from 4.233% on March 27. The winning yield for the seven-year U.S. Treasury bonds was 0.2 basis points higher than the pre-issue yield of 4.121%, reflecting a weak demand tail spread, marking the second consecutive occurrence of a tail spread, after previously experiencing six consecutive "oversubscriptions."

The bid-to-cover ratio for this auction was 2.55, compared to 2.53 in the previous auction, below the average of 2.67 from the last six auctions.

The market is most concerned about the internal data of the auction:

Although the direct bidding ratio reached 25.44%, it is not considered abnormal; in fact, this ratio is lower than last month's 26.1%.

The weakest link again was the indirect bidding segment, which only secured 59.3% of the total allocation, down from 61.2% in March, marking the lowest level since December 2021.

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 "buyers of last resort" for all unsold supply, primary dealers received a share of 15.3% in this round, the highest level since May 2024, also reflecting weak demand.

Financial blog Zerohedge commented that overall, this was a rather weak auction, not only due to the tail spread issue but also concerning the continued decline in foreign demand for U.S. Treasuries. If foreign demand truly collapses, the Federal Reserve will have no choice but to intervene and begin monetizing these bonds. The Fed only needs an excuse, and against the backdrop of Powell and Trump being at an impasse over intervention issues, such an outcome could be very ironic.

Gareth Berry, a strategist at Macquarie Group in Singapore, previously stated that this week's U.S. Treasury auction is a "litmus test" for overseas buyers' demand for U.S. bonds in the context of Trump's trade war:

In this week's U.S. Treasury auction, the scale of indirect bidding should be an important focus. Foreign official holdings are concentrated in short-term bonds, so the auctions of five-year and seven-year Treasury bonds will be important indicators of global purchasing willingness.

In this week's major auctions, the two-year Treasury auction performed poorly, with a significant decline in overseas demand; the five-year Treasury auction on Wednesday stabilized, with overseas demand down but not collapsing The latest seven-year U.S. Treasury auction shows that overseas demand is once again exhibiting a very weak trend