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Treasury Auctions and Foreign Demand: A Quiet Driver of the Dollar

US Treasury bonds are the world's main safe asset, and how foreign investors buy them affects the dollar and yields.

The government sells new debt regularly through auctions, with results announced shortly after bidding closes. Observers watch measures such as the bid-to-cover ratio, which compares the amount of bids to the amount offered, and the share bought by indirect bidders, a category that includes foreign central banks and investors.

Strong demand means buyers accept lower yields, a sign of confidence. Weak demand, with a large gap between the expected and actual yield, can push yields higher quickly, and may affect the dollar.

Other data on foreign holdings appears monthly in the Treasury International Capital report, which shows net purchases and sales of US securities by foreigners. A sustained decline in foreign buying can raise concerns about financing of the US deficit, although the data has substantial lags and revisions.

The dollar's relationship with yields is not fixed. Rising yields that reflect stronger growth and tighter Fed policy tend to support the dollar. Rising yields that reflect fiscal worries or poor auction demand can coincide with a weaker dollar.

Context determines which story applies, so check whether the move in yields is driven by real rates or by risk premiums.

Practical step: look up the results of the next Treasury auction, and note the bid-to-cover and the yield compared with the market before the auction.

The tail is the number to look at on auction results, meaning how far the final yield came in above where the market was trading just before. A big tail on a long bond auction can move yields and the dollar within minutes. Results for most auctions come out at 1pm New York, which is 6pm Lagos while US daylight time is in effect. So if you're in a USDJPY trade in the early evening, it's worth knowing when the 10 year and 30 year auctions are scheduled that week. USDJPY in particular tends to follow US yields closely, and a weak auction can push it around even without any economic data that day.

Good point on the two kinds of rising yields. Growth and Fed driven yields help the dollar, worry driven yields can hurt it. Same chart, opposite meaning. One way to tell the difference is to look at what stocks and other safe assets are doing at the same time. If yields are rising with stocks and the dollar, it's probably a growth story. If yields are rising while stocks fall and the dollar weakens, the market may be worried about US debt or inflation, and investors are demanding more to hold Treasuries. In that second case, the usual dollar and yield relationship can break, so I'd be careful assuming higher yields mean a stronger dollar.