① The global resistance to long-term government debt is turning the routine auction of U.S. long-term bonds into one of the most closely watched events on Wall Street this week; ② The U.S. Treasury will auction $22 billion in 30-Year U.S. Treasury Bonds this Thursday, as part of its regular borrowing program.
According to Finance Network, June 9 (edited by Xiaoxiang) the global resistance to long-term government debt is turning the routine auction of U.S. long-term bonds into one of the most closely watched events on Wall Street this week.
The U.S. Treasury will auction $22 billion in 30-Year U.S. Treasury Bonds this Thursday, as part of its regular borrowing program. However, the outcome of this auction is bound to attract special attention, as it will immediately reflect the current state of demand in the U.S. Treasury bond market, and interest in 30-Year U.S. Treasury Bonds has cooled recently.
Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, stated, "All auctions will be viewed as a window to test market sentiment. The feeling is that 30-Year U.S. Treasury Bonds are currently the least favored bonds."
In recent weeks, yields on global long-term bonds have surged, due to investors' concerns about spiraling debt and deficits, leading them to avoid these securities and demand higher yield premiums for lending to the government.
As the longest duration bonds in the U.S. Treasury curve, the yield on 30-Year U.S. Treasury Bonds reached a nearly 20-year high of 5.15% last month and was still trading near 4.98% as of Monday's opening, close to the important psychological threshold of 5%.
Higher yields mean increased financing pressure, while the U.S. government's borrowing continues to rise and government spending remains high. A version of the tax and spending bill from the Trump administration passed by the House last month has been projected by some Institutions to increase the U.S. budget deficit by trillions of dollars over the next few years. Moody's also downgraded the U.S. Aaa sovereign credit rating last month.
Fred Hoffman, a finance professor at Rutgers Business School, stated, "We are in a troubling fiscal trend."
Hoffman stated that during his vacation next week, he will still pay attention to the results of U.S. Treasury auctions—the tail spreads and bid multiples will provide clues about demand, and the level of participation from foreign investors will also be in focus.
In fact, just over a month ago, the weak demand in the auction for 20-year U.S. Treasury bonds had triggered a surge in U.S. Treasury yields that same day. If the auction of the 30-Year U.S. Treasury Bond, which serves as a global benchmark, shows similar performance, it will undoubtedly raise more concerns. In addition to the 30-Year U.S. Treasury Bond auction on Thursday, the U.S. Treasury will auction $58 billion of 3-year government bonds on Tuesday and $39 billion of 10-year government bonds on Wednesday.
U.S. Treasury bonds are still facing selling pressure.
Considering the current situation of the bond market, the recent sharp rise in U.S. Treasury yields may attract some buyers. McIntyre from Brandywine Global Investment stated that he recently bought 30-year bonds at a yield of about 5%, and some believe this level is quite attractive.
However, for many, even if the outlook for short-term bonds improves in the context of a potential interest rate cut by the Federal Reserve in the second half of the year, long-term yields will still remain high in the foreseeable future.
Greg Peters, Co-Chief Investment Officer at PGIM Fixed Income, stated that given the increasing correlation of long-term government bonds with political forces rather than monetary policy, avoiding long-term government bonds will be safer.
"Look at what is happening in the long-term interest rate market: it is becoming disconnected," Peters, who manages $862 billion in assets, said in an interview last Friday. "It is driven by risk premiums, politics, and all these other factors."
Another recent factor affecting demand for U.S. Treasury bonds is a controversial provision in a tax bill supported by Trump—the "Section 899" clause in the bill. This clause would allow the U.S. to impose additional taxes on businesses and investors from countries it considers to have "unfair" tax policies, raising concerns about foreign buyers boycotting U.S. Treasury bonds. House Ways and Means Committee spokesperson JP Freire stated that this retaliatory tax would not cover interest from diversified investments like U.S. Treasuries, but doubts remain.
All these factors have collectively triggered what is known as a steepening of the yield curve, raising the compensation that investors require from the government for loans spanning several decades — the so-called term premium. A widely watched 10-year term premium indicator compiled by the New York Fed is currently about 75 basis points, whereas about a year ago it was negative.
In terms of economic data, the highlights of this week are several sets of U.S. inflation indicators — including CPI and PPI, as well as inflation expectations indicators, all of which could trigger further volatility in the yield curve. The U.S. May non-farm payroll data released last Friday was better than expected, which temporarily drove up U.S. Treasury yields.
Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, stated, "Overall, a steepening yield curve is the most likely outcome going forward. If we get sufficiently weak data, the Federal Reserve will cut rates, which will lower short-term yields. However, I believe that long-term yields will still be affected by issues surrounding the deficit, the long-term outlook for a weaker dollar, and capital inflows."
Editor/Somer