The U.S. Treasury recently auctioned $13 billion in 20-year bonds, achieving a high yield of 4.935%. At the time, the WI level was 4.951%, resulting in an auction tail of -1.6 basis points, compared to a six-month average of -0.1 basis points. The bid-to-cover ratio was 2.79, which is higher than the six-month average of 2.62. Direct bidders acquired 21.86% of the bonds, up from the six-month average of 18.0%. Indirect bidders made up 67.43%, slightly down from an average of 68.0%. Dealers received 10.72%, below the typical 14.0%. ### The Auction Grade This auction received an ‘A’ grade, reflecting strong domestic interest. International buyers participated at a level close to their average, easing the dealers’ burden. Despite this robust auction, yields in the U.S. have been rising. The 10-year yield rose to 4.387%, an increase of 5.2 basis points. The 30-year yield reached 4.957%, up 5.4 basis points, closely matching the auction level. The solid demand in the report indicates that investors view current yield levels as appealing for long-term debt. However, this strong auction result comes amidst rising overall market yields, hinting at other influential factors affecting the bond market. ### The Impact of Inflation One major factor is ongoing inflation. The latest Consumer Price Index revealed a 3.2% annual increase in February, which was higher than expected. This suggests the Federal Reserve may delay interest rate cuts, putting upward pressure on rates. We anticipate that this trend will overshadow specific auction results for now. This environment creates a mix of signals—strong bond demand against persistent inflation—which could lead to continued volatility. The MOVE Index, which measures bond market volatility, remains high around the 100 level, significantly above its historical average, indicating uncertainty. As a result, we are exploring strategies that benefit from price fluctuations, such as buying straddles on Treasury-linked ETFs. The strong participation from direct bidders indicates that domestic investors are securing long-term yields, betting that rates might be at a cyclical peak. This situation could make selling out-of-the-money call options on 10-year Treasury note futures (/ZN) an appealing strategy for earning income, as we believe yields are unlikely to spike significantly from current levels. Reflecting on late 2023, we experienced similar volatility before yields dropped, prompted by a clear change in Federal Reserve communication. Recent meeting minutes show that officials are wary of cutting rates too soon, so we are not preparing for a major bond rally just yet. Instead, we aim for strategies that manage risk and operate within a range until a clearer trend develops. Create your live VT Markets account and start trading now.

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