The U.S. Treasury is set to auction a total of $112 billion in medium- and long-term debt this week, prompting close scrutiny from bond markets for any signs of weakening demand.
Auction Schedule
- Tuesday: $48 billion in 3-year notes
- Wednesday: $40 billion in 10-year notes
- Thursday: $24 billion in 30-year bonds
While billions in short-term Treasury bills are also being auctioned, they attract less scrutiny due to their shorter maturity.
Record Borrowing Levels
Last week, the federal finance manager announced a record borrowing level of $776 billion for the final quarter of the year. Furthermore, the first quarter of the upcoming year is expected to see an additional record borrowing of $816 billion. High government spending and increased interest costs on debt have contributed to this surge in borrowing.
Concerns Mount over Debt Supply
Investors are growing concerned about the increasing supply of government debt and who will ultimately purchase it. BMO Capital Markets’ Ian Lyngen raised concerns, citing weak demand for only one of the nine 3s/10s/30s auctions in the third quarter. This lackluster demand does not bode well for the upcoming auctions.
Importance of the 10-Year Treasury Auction
Among the upcoming auctions, the most crucial one to watch is the 10-year Treasury auction. This auction is a key economic indicator that influences rates on mortgages, credit cards, and bank loans. It attracts significant global participant involvement and diverse investor types, making it a benchmark in the fixed-income world.
Assessing the Success of Government Debt Auctions
Investors seeking insight into the success of government debt auctions can rely on several key metrics. The highest yield offered at the auction, which commences at 1 p.m. Eastern Time, can serve as an indicator of demand. If the government is required to offer a higher yield at the auction, it signifies weak demand.
Another important metric to consider is the bid-to-cover ratio, which compares the dollar value of bids to the dollar value of debt offered. Declining bid-to-cover ratios suggest a decrease in investor interest. Additionally, higher purchases by primary dealers, who acquire any remaining supply not taken by bidders, can indicate trouble. Conversely, lower purchases by foreigners may also raise concerns.
As of October 2022, foreign ownership of U.S. government debt stood at 23%, significantly lower than the 34% observed a decade earlier.
There is reason to believe that upcoming auctions could yield positive results. Yields on 30-year and 10-year debt have experienced a substantial increase in 2023 and are currently approaching their 15-year highs, at 4.831% and 4.662% respectively.
The Treasury’s decision to offer lower-than-anticipated amounts of long-dated debt also contributes to the optimistic outlook for the auctions. This move may encourage investors to secure yields at current levels, as reduced sales of long-term debt have the potential to result in lower yields.
It is important to note that technically, auctions cannot fail. The Treasury market, being one of the largest and most liquid in the world, relies on primary dealers who are obligated to purchase government debt at any price.
Nevertheless, if even a single auction indicates weaker signs of demand, it will undoubtedly draw intense scrutiny towards government spending, warned Torsten Sløk, Chief Economist at Apollo Global Management.
