The U.S. Treasury conducted a 20-year bond auction showing remarkably strong demand, with direct bidders achieving a record-high allocation percentage representing domestic demand, while primary dealers received one of the lowest allocation percentages in history. Meanwhile, the average rate for 30-year fixed-rate mortgages dropped significantly by 12 basis points from Monday to 6.13%, marking the lowest level since late 2022.

On the eve of the Federal Reserve's rate decision, Tuesday's 20-year Treasury auction demonstrated exceptionally robust demand, with direct bidders representing domestic demand achieving a record-high allocation percentage. Additionally, U.S. mortgage rates declined sharply as investors in mortgage-backed securities appeared to position themselves ahead of the widely anticipated Fed rate cut.

**20-Year Treasury Auction Results**

The auction's stop-out yield came in at 4.613%, significantly lower than last month's 4.876%, representing the lowest level since October 2024. The winning yield was 0.2 basis points below the when-issued yield of 4.615%, marking the third consecutive auction to price below the when-issued level.

The auction's bid-to-cover ratio reached 2.74, higher than July's 2.54, marking the second-highest level since March and exceeding the average of 2.65 from the previous six auctions.

Market participants focused primarily on the auction's internal metrics:

- Indirect bidder participation reached 64.6%, up from 60.6% in the previous month. Indirect bidders typically include foreign central banks and other institutions bidding through primary dealers or brokers, serving as a gauge of overseas demand.

- Direct bidder participation hit a record high of 27.9%. Direct bidders include hedge funds, pension funds, mutual funds, insurance companies, banks, government agencies, and individuals, representing a measure of domestic U.S. demand.

- Primary dealers, who serve as the backstop for any unsold supply, received only 7.6% of the allocation, one of the lowest levels on record, highlighting strong actual demand.

Financial commentary noted that following last week's three strong coupon-bearing bond auctions, excluding the panic caused by the "liberation day basis trade," 10-year Treasury yields had fallen to their lowest levels since October last year. With the Fed expected to cut rates by at least 25 basis points at the September meeting, markets showed little anxiety about Tuesday's 20-year auction.

This sentiment proved correct, with the auction demonstrating very solid performance overall. The month's highlight was the record direct bidding ratio, clearly indicating sufficient demand.

Following the auction results, 10-year U.S. Treasury yields retreated to daily lows.

**U.S. Mortgage Rates Reach Three-Year Low**

According to industry reports, the average rate for 30-year fixed-rate mortgages dropped substantially by 12 basis points from Monday to 6.13%, marking the lowest level since late 2022.

Industry analysis suggests that the overall trend resembles September 2024, when mortgage rates experienced similar movements ahead of a Fed meeting with nearly 100% certainty of a rate cut. At that time, mortgage rates paradoxically increased after the Fed announced the rate reduction, and a similar scenario could occur this time, though it's not guaranteed.

This phenomenon aligns with historical trends. Real estate industry analysis indicates that reviewing nine Fed rate-cutting cycles over the 45-year period since 1980 reveals that cuts occurring during recessionary environments ultimately lowered the long end of the yield curve, including 10-year and 5-year yields.

However, in non-recessionary environments like the current situation, rate cuts don't significantly impact long-term rates. Therefore, while expecting at least one 25 basis point cut followed potentially by another 25 basis point reduction, even a 50 basis point cut on the short end of the curve likely won't substantially affect the long end.

Current yields remain well below levels from two to three weeks ago. Market observers suggest potential "buy the rumor, sell the fact" behavior, with 10-year Treasuries potentially experiencing modest selling pressure after the Fed officially announces a 25 basis point cut.

**Risk Disclosure**

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