Monday's Treasury Bond Auction Could Rattle Stocks. Here’s What Investors Need to Know

An impending auction of 20-year Treasury bonds scheduled for Monday has the potential to unsettle markets during what would otherwise be a relatively calm, holiday-shortened week, caution industry strategists.

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The apprehension among investors has roots in the aftermath of a $24 billion auction of 30-year Treasury bonds (BX:TMUBMUSD30Y) on November 9, which reverberated across markets. Following the auction, Treasury yields surged, prompting a significant downturn in U.S. stocks.

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Bond auctions, once a peripheral concern for markets, have now evolved into prominent events that capture the attention of investors. The repercussions of subpar bond auction results were traditionally confined to the specific class of bonds being auctioned. However, recent auctions have demonstrated a more pronounced impact on stock markets, as highlighted by a Citigroup Inc. (C, 0.40%) equity analyst.

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Stuart Kaiser, Head of Citi’s U.S. equity trading strategy, emphasized the increasing influence of auctions on equity markets, stating, “The worst 30-year UST auction since Nov-2021 spilled over to stocks. The SPX was up modestly ahead of the 1p auction on 9-Nov but sold off as much as 100bps after.” He further noted that the average move on 10- and 30-year auctions over the past two years has exceeded 1%.

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The November 9 auction of 30-year bonds, with a "tail" of 5.1 basis points, marked the most unfavorable outcome in nearly two years based on the bonds’ discount to the prevailing market price at the time of auction. The "tail" represents this deviation, a concept crucial for understanding the mechanics of U.S. Treasury auctions.It is noteworthy that a ransomware attack on the American branch of Industrial & Commercial Bank of China (ICBC) was attributed to disrupting trading around the November 9 auction of 30-year bonds. Markets swiftly rebounded the following day.

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Dealers acquiring almost 25% of the bonds disappointed fixed-income strategists, interpreting it as a signal of diminishing demand from buy-side buyers and central banks.

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On November 9, U.S. stocks experienced an afternoon slump, erasing earlier gains as Treasury yields climbed. The Dow Jones Industrial Average (DJIA) concluded the session down over 200 points, while the S&P 500 (SPX) and the Nasdaq Composite (COMP) fell by 0.8% and 0.9%, respectively.

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The Treasury Department is set to auction $16 billion in 20-year bonds (BX:TMUBMUSD20Y) on Monday, and the results are expected around 1 p.m. Eastern Time.

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In early trade, Treasury yields saw a modest increase, with the yield on the 10-year note (BX:TMUBMUSD10Y) up 3.3 basis points at 4.475%. The market remains watchful, anticipating the potential impact of the upcoming auction on both the fixed-income and equity markets.

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