(Bloomberg) -- A historic surge in bonds got a green light to continue after an auction of 20-year debt that had traders fretting went off without a hitch.

The auction drew a slightly lower-than-expected yield, a sign that demand was stronger than anticipated, despite its unusual timing on a Monday of a holiday-shortened week. It was the first sale of long-maturity US Treasury debt since Nov. 9, when a 30-year bond auction produced unequivocally bad demand metrics. 

Long-dated Treasuries rallied after the 20-year results were announced, generating immediate gains for buyers of the $16 billion auction, who received 4.780%. The new bonds richened by 3 basis points from that level, along with other long-dated yields, which had begun the US session higher on the day. 

It’s a “solid auction for a nervous market,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. The markets are breathing a “collective sign of relief,” he added. The 30-year auction tanked after a rally trimmed yields in the sector by around half a percentage point from their October highs. It trades at a profit now, though, signaling that investors are no longer balking at lower yields.

The market faces a final coupon supply test this week Tuesday in the form of a $15 billion auction of 10-year Treasury inflation-protected securities, the first since September. The TIPS auction is poised to produce the highest yield since 2009, around 2.12%. TIPS pay lower yields because their principal is adjusted for inflation.

Bonds’ Best Month Since March Faces ‘Sanity Check’ in Auction

Before Monday’s auction, traders were worried that a poor sale during the week cut short by the Thanksgiving holiday would sap momentum from the recent rally in government bonds. The $24 billion auction of 30-year bonds on Nov. 9 sent the market down briefly, but sharply.  

The 20-year produced other strong demand metrics. Indirect bidders, a group of investors that includes foreign central banks, were awarded the biggest share of a 20-year bond auction since June. Following the auction, US stocks extended a rally, with the S&P 500 advancing toward its highest since August. 

Spurred by signs of slowing inflation and cooling growth, traders and investors have rushed into US government debt, persuaded that the Federal Reserve is done raising interest rates and will shift to cutting them by the middle of next year. 

US Treasuries have gained 2.6% this month trough Friday, cutting their loss for the year to merely 0.2%, according to data compiled by Bloomberg. 

Following a more than three-decade hiatus, the Treasury Department resurrected 20-year bonds in May 2020. Until this year it had never sold the securities during US Thanksgiving week. 

The bonds have been trading at a discount to other long-term maturities, a sign of tepid demand. 

Peter Boockvar, chief investment officer at Bleakley Financial Group, cautioned that Monday’s auction results aren’t indicative of underlying demand for longer-term bonds. 

Because of “its somewhat orphaned status, and small size, I don’t know what to make of the auction in terms of messaging,” Boockvar wrote in a note to clients.

(Adds Tuesday’s TIPS auction, updates yield levels.)

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