Add one more thing to the list of worries for the world’s most indebted nation: weakening demand at its bond auctions.
While there’s no danger of the U.S. being unable to borrow as much as it needs, over the past two years, the drop-off has been unmistakable. Based on the number of bids that investors submitted versus the amount sold, average demand for 10-year notes has fallen to the lowest since October 2009.
Now for bond traders, there’s little in the data to suggest that weak auctions lead to losses in Treasuries, but it’s an early sign some investors are backing away from funding America’s obligations as U.S. budget deficits balloon and the Federal Reserve is raising interest rates. It’s a potentially toxic mix that could erode demand even more in the months ahead.
“There’s no good playbook, unfortunately,” said Thomas Simons, a money-market economist at Jefferies. “Treasury supply is further exacerbating what should be a natural move away from the market” as interest rates climb.
The yield on benchmark 10-year Treasuries has already risen around half a percentage point this year and was at 2.89 percent as of 7:30 a.m. Thursday in New York.
The government’s financing needs have already started to grow. As a result of the Trump administration’s tax cuts, the deficit is set to widen and reach almost $1 trillion next fiscal year. The shortfall is on top of the almost $21 trillion of debt the U.S. already owes, more than any other country. (Roughly 70 percent of that total is in the form of Treasuries.)
Excluding short-term bills, the U.S. government plans to borrow $62 billion at debt auctions this week by offering Treasuries due in 3, 10 and 30 years. The total is about $6 billion more than auctions of the same maturities in January. The first batch of enlarged sales last month were “noticeably worse” by most measures, Simons said.
Economists have questioned the value of Trump’s debt-financed tax cuts this far into the post-crisis economic cycle, in part because the stimulus is a departure from prevailing theory and the norm in recent decades. Borrowing has tended to decrease when the Fed is raising rates, and vice versa.
And with Fed officials projecting three rate increases this year, the opposite is poised to happen in 2018.
In the past two years, the average bid-to-cover ratio for 10-year note auctions has fallen to 2.46, the lowest since the period encompassing the financial crisis. As recently as 2013, the two-year average was above 3.