ZeroHedge, which I use for some commentary on US debt auctions (you can find direct info and the auction schedule and results on treasury.gov), described yesterday’s auction of two-year debt as a “blowout”. Not sure that is how I would characterize it. First of all, this was another $69 billion in debt issued, as the astounding size of these auctions of shorter-term debt continue. The Treasury is keeping a lot of debt on the short end, I think in the forlorn hope that interest rates will come down more on the long-end and it can refinance at lower total interest cost. Demand was strong for these short-end notes, probably because of the perception that there is limited default risk over two years and that rates won’t rise much in this period of time. But the interest rate at which bids were accepted was as expected and is 4.34%, up from the rate paid just last month at 4.27%, and way higher than rates were just a couple of years ago. Not a ringing endorsement of the size of the US debt pile.
Trump has tended not to worry about debt; he built his business career on screwing lenders whenever possible. But he needs to address this immediately and no amount of government “efficiency” is going to do the trick. He will have to address Social Security, Medicare and Medicaid, and all the government subsidies for non-“renewable” energy and other government initiatives that business loves. He also should reform the tax code to get rid of all the tax dodges available only to rich Americans, dodges that cost hundreds of billions in revenue. If he doesn’t get the deficit under control quickly, the economy and his administration are doomed.
Update. If you look today at the interest rates in the aftermarket for ten-year US notes and 30-year bonds, you will see that they are both back at the yearly high. That is not a good sign for the future of interest rates. One reason I think the Federal Reserve is backing off more rate cuts is not just concerns about inflation, but a fear of losing credibility. Every time the Fed cuts rates, and the market responds by pushing the aftermarket rates higher, it furthers the disconnect between whatever the Fed tries to do and what the universe of buyers actually thinks is going on. You can find the charts on yahoofinance, CNBC or multiple other places.
Further Update. Another huge auction today just finalized, $70 billion in five-year notes, also a good auction from a demand perspective, but another higher-than-recent-auctions interest rate. It is going to be a rough few months for the sale of US debt unless and until people see some clear sign that Trump will get the deficit going down.
