Today's 20-year US Treasury auction will serve as a barometer for ultra-long duration.

Why is today's 20-year US Treasury bond auction important?

Markets are concerned that today could be a repeat of the ugly 30-year US Treasury auction at the beginning of the month. At that time, dealers were forced to buy 24.7% of the amount issued, almost double what they had to absorb on average since the beginning of the year for auctions of the same tenor. Primary dealers must buy the debt not purchased by other bidders during a US Treasury auction. Therefore, an increase in their take is synonymous with deteriorating demand.

November's 30-year auction tailed When Issued by 5.3 basis points, the most on record (since 2016), provoking a deep selloff in the bond and stock market. Although it is unclear whether a ransomware attack on ICBC weakened demand, it's key to note that indirect bidders were sensible lower, making issues concerning ICBC unlikely to be the only contributors to deteriorating demand. It is more likely that declining demand was caused by the sudden drop in yield, which saw 30-year bonds getting almost 50bps more expensive from their peak at 5.14%.

That brings us to today, as the 20-year US Treasury note pays a yield of 4.8%, roughly 45bps below the high yield at October's auction.

It will be key to see whether investors are willing to extend the duration at current levels or are demanding a higher yield.

Nonetheless, if demand increases, it could give the green light to bond bulls, and the yield curve can further bull-flatten, pushing 10-year yields towards 4%. Yet, a rally might be contained. From September until today, leveraged funds have reduced their short positions in 20-year T bond futures. Therefore, today, a solid 20-year US Treasury auction might not trigger enough short covering to push 10-year yields below support at 4.36%.