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Uh-oh, the Treasury Debt Market is Looking Even Weaker

By February 26, 2024Commentary

Today the US Treasury sold an astounding $125 billion in debt, about half in 2 year notes and half in five-year.  Neither auction went well and the myth that the Federal Reserve controls interest rates is being burst even on the short maturities.  One way to think about the scale of the problem is to imagine that every auction was just replacing current debt instruments, so the buyer had a maturity and got their investment back and probably would just replace that with the new debt.  If that were all that was happening, you likely would not have a demand issue.  But with the auctions in the last couple of years, and this year for sure, you don’t just have “rollover” debt that might be easily absorbed, you have trillions in new debt that also has to find a buyer, in a market that already is sopping up tens of trillions in investments and has to compete with state, local, corporate and foreign debt issuance, all of which are near record levels as well.

So no surprise, the auctions today were not great.  The $63 billion 2-year note auction had a higher yield than the previous auction and had to pay a higher interest rate than originally projected.  Demand indicators showed some weakness as well.  (ZH Post)   Then the five-year note $64 billion auction went about the same, with a higher interest rate than the prior auction and than the original indication, with similar weak demand statistics.  Rates on US debt rose across the board in response to these auctions.  The Federal Reserve is in a real bind, because they don’t want to try to cut rates only to see the market laugh at it.  There is very high debt issuance all year, so I think the Fed will be hindered in doing any rate cuts, particularly if we see continued inflation pressure.  (ZH Post) 

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