We are living in a new, even more distressing era in the bond market.
Not long ago, bonds were considered unattractive – a quiet, orderly way for investors to build wealth without taking on the risk that stocks present. But those days seem long gone.
Today, concerns remain even around U.S. Treasury auctions – sales of debt by the government to banks, foreign central banks, hedge funds and retail investors to finance its operations. A growing federal budget deficit has led to an oversupply of Treasury securities and raised the question of who will buy U.S. debt.
The next test will be Wednesday’s sale of $42 billion in 10-year bonds. A sale of $25 billion of 30-year debt is planned for Thursday.
“It’s a new thing that’s got people’s attention,” said James St. Aubin, chief investment officer at Sierra Mutual Funds. “The offer is a real element of change in the market. »
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Concerns first emerged after a 30-year bond auction in November went disastrously, following an increase in the supply of bonds on offer. Demand hasn’t been this weak since then, but recent 3-, 10- and 30-year debt auctions have generated modest interest.
Warm bidding can gradually increase returns over time, experts say. The basic calculation for bonds is that if supply increases and there are fewer buyers, the value of the bonds falls in the market, causing the interest rate or yield on the debt to rise.
Rising yields are bad news. They raise borrowing costs across the economy, from credit cards to mortgage rates, while forcing states and local governments to pay more interest on their debt.
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“I view auctions as death by a thousand paper cuts,” said Barry Knapp, managing partner of Ironsides Macronomics. “It just causes rates to gradually increase over time.”
The yield on the 10-year Treasury debt rose to 4.461% Tuesday afternoon from less than 4% at the end of last year. Supply side is one reason, although uncertainty about the economy and whether the Federal Reserve has made enough progress in its fight against inflation to reduce interest rates are the main ones. factors behind this decision.
The Fed could now help limit yields. The central bank announced on May 1 that it would reduce its balance sheet more slowly starting in June. This means that it will reinvest more of the money it receives when its public debt holdings mature into Treasury bonds. This could mean less debt will be available on the market, reducing pressure on private investors to buy more.
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Comments from Chairman Jerome Powell indicating that rate hikes are not on the agenda are also likely to weigh on yields. This suggests that traders may be inclined to buy more longer-term debt securities this week to lock in the current high yields.
A third positive factor was last week’s weaker-than-expected April jobs report. It suggests the Fed is making progress in slowing the economy as it seeks to rein in price growth, raising hopes of multiple rate cuts by the end of the year. This gives investors a reason to buy Treasury debt now.
Certainly, there could be a reluctance to purchase debt securities maturing this far into the future, when investors can still earn attractive returns on short-term securities. The last auction of 4-week bills yielded 5.275%.
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How this week’s auction unfolds could generate an unusual level of interest. No economic data likely to guide trade should be published immediately.
“Luckily for the United States, it’s the cleanest dirty shirt,” St. Aubin said, using a phrase made famous by famed bond investor Bill Gross. “It’s always on a relative basis, your only option” despite fears the country is on an unsustainable path with its debt.
Write to Karishma Vanjani at [email protected].
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