You may have noticed that our government spends far more than it takes in. This of course means that the Treasury will have to issue a lot of debt in the form of bonds to cover these expenses – much of it over the next year. Which raises a question: how is this going to happen?
Recently things haven’t been going so well. The last few times the U.S. Treasury has issued bonds, investors haven’t been impressed.
“Demand is not as robust as it used to be,” said Marvin Loh, global macro strategist at State Street Global Markets.
The Treasury Department offered investors an interest rate. And the investors said, “I don’t think so, do better.” » The Treasury therefore had to do better.
“If we do an auction and the required interest rate is higher than before the auction, then it looks like the bid is lower,” Loh said.
It was weaker because of the uncertainty. The last thing an investor wants is to lock up their money in a 10-year bond only to find out they could have put their money somewhere else that was just as safe, locked it away for less time and get more money from it.
“You kind of lost some of that revenue,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute.
This fear of missing out is entirely possible right now. Bond investors could put their money in short-term bonds, whose interest rates are heavily influenced – coincidentally – by the Federal Reserve.
Investors therefore want to know what the Fed is going to do. But as inflation has become unpredictable recently, this is not the case.
“The lack of interest in some of these Treasury auctions reflects this uncertainty,” Loh said.
For a given price, investor appetite is limited. This is important because they will soon need a very big appetite.
“The total amount of government bonds coming to the market amounts to more than $10 trillion over the next 12 months,” said Torsten Slok, chief economist at Apollo Global Management.
And yes, he said 10 trillion with a “T” – that’s a third of the United States’ gross domestic product.
Increasing the appetite of bond investors that big may not be cheap.
“The end result would be higher interest rates,” Slok said.
The government would have to pay more to take out loans, which could significantly raise interest rates in the economy.
“That means mortgage rates are going up, which means the price you have to pay for your monthly car rent is getting more expensive,” Slok said.
So public borrowing is not just a problem for the government, it could be a problem for everyone.
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