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. (Bid-to-cover compares the volume of securities that dealers enter bids for to the volume offered for sale).
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 (not to mention the staggering budget deficits under The Bush and Obama Administrations), 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.
This “double whammy” of Fed tightening and Treasury increased borrowing is not likely to go away anytime soon as Treasury issuance increases and The Fed continues to normalize monetary policy.
The next 10-year auction is today at 1pm. Let’s see if Whammy is still pitching.