The US Treasury recently auctioned 20-year bonds, raising $13 billion with a high yield of 4.613%. This yield was close to the expected level of 4.615%, resulting in a small tail of -0.2 basis points, which is better than the six-month average tail of 0.4 basis points. The bid-to-cover ratio was impressive at 2.74 times, higher than the six-month average of 2.65 times. Domestic direct bidders made up 27.87% of the total, greatly exceeding the six-month average of 19.5%. Indirect bidders, mainly from abroad, accounted for 64.56%, slightly below the average of 67.2%.

Dealers Portion

Dealers acquired 7.57% of the bonds, significantly lower than the six-month average of 13.3%. The overall performance of the auction received an A- grade, reflecting strong demand and favorable conditions for these 20-year bonds. The strong interest in 20-year government debt suggests that many believe interest rates are close to their highest point. The large share of direct domestic buyers indicates that investors are eager to secure these yields, thinking rates won’t rise much further. This could indicate a turning point for the bond market after a period of uncertainty. Timing is crucial, especially following the Federal Reserve’s decision to keep rates steady in its July 2025 meeting. Last week, the August 2025 inflation report showed core CPI moderating to 3.1%, reinforcing market confidence that the rate hike cycle is ending. We witnessed a similar trend in late 2023 when strong auctions preceded a bond market rally as the Fed hinted at a shift.

Derivatives Traders Outlook

For derivatives traders, this suggests preparing for lower long-term yields. It might be a good time to establish or increase long positions in 10-year Treasury note futures (/ZN) or 30-year bond futures (/ZB). These investments stand to gain if bond prices increase and yields decrease, aligning with the auction data. This situation may also lead to reduced volatility in the bond market as a general consensus forms. The MOVE Index, which tracks Treasury market volatility, is currently at 110. While this is down from earlier highs this year, it remains elevated compared to historical averages. We see potential in selling volatility, possibly through short strangles on bond ETFs like TLT, to collect premium based on the expectation that rates will stabilize. Lastly, a stable or declining interest rate outlook is typically beneficial for sectors that are sensitive to rates. We could act on this by purchasing call options on growth-oriented indexes like the Nasdaq 100. This cross-asset strategy allows us to benefit from the idea that a calmer bond market will support technology and other growth stocks in the coming weeks. Create your live VT Markets account and start trading now.

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