The U.S. Treasury conducted an auction for $42 billion of 10-year notes, achieving a high yield of 4.255%. The bid to cover ratio was 2.35 times, lower compared to the six-month average of 2.58 times. Domestic buyers accounted for 19.61% as direct bidders, surpassing the six-month average of 16.4%.
International buyers, identified as indirect bidders, made up 64.23%, which was lower than the six-month average of 72.3%. Dealers were left with 16.16%, noticeably more than the average of 11.2%. The auction’s overall grade was classified as a “D.”
Low International Interest
The auction was characterised by low international interest, reflected in the decreased demand from indirect bidders. Domestic interest appeared relatively stronger, potentially influenced by stablecoin demand.
The Treasury auction on August 6th was a clear warning signal. A high yield of 4.255% combined with weak demand shows the market is having trouble absorbing government debt. We should anticipate that interest rates will likely push higher in the coming weeks.
This isn’t happening in a vacuum, as last week’s July 2025 CPI report showed core inflation remains stubborn at 3.8%. The Federal Reserve is unlikely to signal any policy easing with inflation still this far above their target. This supports the case for higher yields across the curve.
Bearish Bond Positions
For us, this suggests looking at bearish positions on bonds. We can consider selling 10-year Treasury note futures (/ZN) or buying put options on bond ETFs like TLT. These trades will profit if bond prices fall as yields continue to climb.
Higher rates are typically bad news for stocks, which we are already seeing. The S&P 500 has pulled back 3% from its July highs, and the VIX is now above 17, showing rising fear. We should consider buying puts on major indices as a hedge or a direct bet on a further downturn.
This environment has echoes of late 2023, when the 10-year yield surged towards 5% and caused significant stock market turbulence. Back then, the market had to adjust to the reality of sustained high rates. It appears we are facing a similar test of conviction right now.
The problem is also one of simple supply and demand, as weak foreign buying forces others to pick up the slack. The Treasury is also scheduled to issue another $120 billion in debt before the end of the month. This continued flood of supply will likely keep upward pressure on borrowing costs.
