US Hit With Greater Trouble Auctioning Its Debt

US Hit with Greater Trouble Auctioning its Debt

By David Haggith – Feb, 2024

It was one ugly bond auction, while the Fed added pressure with its determination not to lower rates anytime soon in the face of stubborn inflation.

Today, the huge upsurge in Treasury issuances to fund Bidenomics during a time when the Fed is no longer the buyer of first resort struggled to find enough buyers in what became, by at least one measure, the worst 20YR Treasury auction on recent record. Bloomberg had written that it expected the auction to show plenty of positives. It didn’t. The yield rose well above the last auction of these 20YR pieces of paper (or clicks on a computer).

The tail of the auction gave it its worse score. A “tail” means that the last buyers to buy the last bonds left for sale in the auction paid a lower price (got a higher yield) than those who bought first. A bad (or long) tail suggests low demand because it means the auction had to keep pushing prices lower (yields higher) in order to find enough buyers to sell off the full allotment of bonds, which must all sell. In the present case, that means the auction had to price down (offer higher yields) more than any on record since 20YR bond auctions were re-introduced in 2020.

The number of non-dealers (direct buyers) soaking up the bonds also dropped. That meant dealers had to hold onto the most bonds, themselves, since May 2021. Their terms as dealers require them, in aggregate, to buy up the whole auction, but they choose the price they bid. With a strong demand, they’re obviously willing to bid to pay higher prices (get lower yields) for the bonds they intend to resell in order to be certain they can sell them all for a profit. This auction indicated they are not so sure they will sell so easily.

Overall this was a very ugly auction … and while it is unclear why demand was so terrible perhaps one can attribute it to nerves from today’s FOMC Minutes….

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