Long-Term Treasury rose after a mediocre auction at which central banks (so-called indirect bidders) bought more than half the total offer, well above their average participation. Foreign central banks have taken down an increasing share of Treasuries offered at auction since the 2008 crisis. That’s a concern. Between the Federal Reserve, which ballooned its balance sheet by $4 trillion in the course of quantitative easing, and other central banks, the Treasury market is increasingly dependent on official institutions. The private bid for long-term bonds seems thin at the present low level of yields. During the last couple of 30-year bond auctions, central banks have taken down more than half of bonds sold, an unusually high proportion.

It’s also noteworthy that nearly all foreign central bank bids were accepted in the last couple of auctions, something that happened only once before in the past seven years. During the period 2008-2011, an average of 60% of central bank bids for 30-year bonds were accepted. Central bank bidders, that is, had to fight with private investors for their bonds. At the last couple of auctions, central banks got all the bonds they asked for, presumably because private bidding was less aggressive.

A shift in central bank purchases, or currency preference, could produce a sharp rise in Treasury yields due to diminished appetite from private investors.

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