The U.S. Treasury is peddling some $112 billion in medium- and long-term debt this week, and bond markets are on alert for any cracks in demand.
On Tuesday, the Treasury Department will auction $48 billion in notes maturing in
three years,
followed by $40 billion in
10-year notes
on Wednesday and $24 billion in
30-year bonds
on Thursday. Billions in Treasury bills, or debt maturing in under one year, are also being auctioned this week, but given their short-term nature they attract less scrutiny.
These issuances come after the federal finance manager last week announced its borrowing level of $776 billion for the last three months of the year, a record for the fourth quarter. It expects to borrow $816 billion for the first quarter, also a record for that quarter. High government spending and rising interest costs on debt have boosted borrowing.
This has led to an increased supply of government debt, and investors are worried about who will step up to eventually buy all this debt from the government.
Concerns arose when there was strong demand for only one of the nine 3s/10s/30s auctions in the third quarter, BMO Capital Markets’ Ian Lyngen wrote Monday. It “doesn’t set a particularly encouraging trend heading into the offerings,” Lyngen added.
The auction for the 10-year Treasury, which is considered an economic indicator, will be the most important to watch. If Wednesday’s auction is weak, yields on the debt could move higher. That matters because the 10-year yield guides rates on mortgages, credit card balances, and bank loans, and higher rates suggest Americans will continue to pay more.
Investors can measure the success of an auction by comparing the highest yield offered at the auction to the yield offered to dealers before the event. If the government has to offer a higher yield at the auction to entice investors, it’s a sign of weak demand.
Other metrics to watch for include the bid-to-cover ratio, or the dollar value of bids compared with the dollar value of debt offered. Falling bid-to-cover ratios indicate less robust interest from investors. Higher purchases by primary dealers, who buy up supply not taken by bidders, is another sign of trouble, as is lower purchases by foreigners.
Foreign ownership of U.S. government debt stood at 23% as of October 2022, the most recently available data, lower than the 34% a decade ago
There is a reason the auctions could go well: Yields on 30-year and 10-year debt, at 4.831% and 4.662% as of Monday, have soared in 2023 and are near 15-year highs. Investors may want to nab debt at current return.
The Treasury’s decision to auction fewer-than-expected amounts of long-dated debt also bodes well for the auctions. It could prompt investors to lock in yields at current levels since a lower supply of debt can push yields lower.
Also, it’s key to note that auctions can’t technically fail. The Treasury market, one of the largest and most liquid in the world, has primary dealers based on the guarantee that they buy government debt at any price.
Still, “you just need one auction that shows … weaker signs of demand” and government spending will be under intense spotlight, Apollo Global Management’s chief economist Torsten Sløk told Barron’s.
Write to Karishma Vanjani at [email protected]
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