When the Federal Reserve cuts its key interest rate by a half a percent, everyone expected that all interest rates would fall. But within a couple of days rates on US debt were actually rising. There are two reasons. One is ongoing concerns about inflation. Continued rising wages and other prices don’t support the notion that inflation is disappearing. But the most important reason is that the US debt pile keeps growing at an alarming rate. Supply and demand factors will predominate. And a 3 year note auction shows this dynamic and the impact. As is usual now, the size of the auction is a near record, $58 billion, an example of the amazing amounts of debt being sold, so there have to be more buyers or buyers worth buying more.
The auction characteristics were dreadful. The interest rate paid was higher than expected. Demand was weak and foreign buying in particular evaporated. What was most surprising is that shorter-term debt has held up fairly well in auctions over the summer, but not this time. Interest rates across US debt maturities rose this afternoon in response to this auction. A ton more debt has to be issued in coming weeks to meet all the deficit spending, and the roll-over of portions of our immense debt load. Expect more poor auctions all fall and into winter.
