The U.S. Treasury has just conducted a $21 billion 10-year Treasury note auction, which may spook some investors. Interest rates have already risen on the long-end of the yield curve in anticipation that the Federal Reserve will begin the ending process of quantitative easing measures. With the yield going off at 2.67%, this marks the highest yield of a 10-year auction in nearly two years.

The 2.67% yield is for a nine-year and nine-month note, and the yield was higher than the 2.64% seen earlier today even if that is the same yield for the on-the-run Treasury notes at Noon and at 1:00 p.m.

To show just how much rates have risen, the coupon for the 10-year note was only 1.75%, and that $92.085831 price went off at a significant discount. The discount for the low coupon might even make us wonder of the Treasury thinks that interest rates have risen too far too fast. If so, they are alone.

The bids were at $53.9 billion, with a tiny amount over $21 billion accepted in total. This generated a bid-to-cover ratio of 2.57 in the auction. The following bids and offers were accepted by group:

• Primary Dealers, bidding for their own house accounts, bid $36,085,000,000 with only $9,474,580,000 accepted as they were trying to buy on the cheap.
• Direct Bidders, non-primary dealers bid $6,132,000,000 and had $3,413,880,000 accepted.
• Indirect Bidders, a measure of foreign central banking demand, had the largest part of the auction on a percentage accepted basis with bids of $11,668,700,000 and a total of $8,090,966,400 accepted.

It is often said that high prices will cure high prices, just like low prices will cure low prices. It is often the same case when it comes to Treasury yields. If yields rise too much, investors will opt for the safety of the guaranteed return and that will drive the prices back up and the yields back down. Despite the recent rise in interest rates, the domestic demand was just not solid enough to make us think that investors are ready to plow all of the investing funds back into longer-dated bonds.

Keep in mind that this is now a 100 basis point rise in longer-term rates in just two months. The 10-year yield was 1.63% as recently as May 2, 2013 versus 2.67% in this auction. This has raised mortgage and other borrowing rates by roughly the same amount.

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