US economy

US Treasury forced to pay up to fund record stimulus

The US government faced lacklustre demand for its latest record auction of long-dated Treasury bonds, marking one of its first mis-steps in funding historic spending packages passed by US legislators since March.

On Thursday, the Treasury department struggled to offload $26bn of 30-year bonds at record-low interest rates. Instead, the bonds were sold at a yield of 1.4 per cent, more than 0.02 percentage points above market expectations at the time of the auction deadline. 

Investors submitted bids for 2.14 times the amount on offer, he lowest bid-to-cover ratio for 30-year bonds since July 2019, according to Thomas Simons, a money market economist at Jefferies. 

“Suffice to say, the auction did not go all that great,” he wrote in a research note following the results.

The disappointing result caused a sell-off in the Treasury market and long-dated Treasuries sold off at a faster pace than short-dated notes, sending yields higher.

The yield on the 30-year bond spiked more than 0.05 percentage points to 1.43 per cent, while the 20-year yield rose roughly by the same magnitude to 1.19 per cent.

The sell-off in two-year Treasuries was much more muted, with yields climbing less than 0.01 percentage points to 0.16 per cent. The difference between yields on five-year and 30-year Treasuries — a closely watched measure of the yield curve — steepened as a result, to 111 basis points.

The disappointing 30-year auction followed a record $38bn sale of benchmark 10-year Treasury notes on Wednesday which had been met with strong demand. Investors also eagerly snapped up $48bn of new 3-year notes — yet another record amount — at an auction held on Tuesday. 

Line chart of 30-year US Treasury yields, % showing Weak auction rattles investors

The large auctions are part of the Treasury department’s plan to borrow an additional $2.2tn by the end of the year in order to fund a new fiscal programme currently being debated by White House and Congress.

Gennadiy Goldberg, senior US rates strategist at TD Securities, called Thursday’s auction “weak” and a signal to the Treasury department about the market’s ability to take down increasingly larger blocks of debt. 

“They have very aggressively stepped up the size of their auctions,” he said. “This may be the market’s way of saying ‘we are struggling here’.”

The surge in Treasury supply, especially at the long-end, was likely to prompt the Fed to adjust the contours of its bond-buying programme, added Mr Goldberg. The Fed is currently purchasing Treasuries of all maturities at a pace of $80bn per month, having at one point bought at a pace of $75bn a day at the worst of the financial turmoil in March.

“The Treasury is playing chicken with the Fed,” said Mr Goldberg. “If the market starts to get sloppy, the Fed has to step in.”


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