Our President always wants to be the center of everything and doesn’t mind creating chaos while he does it. His daily pronouncements create uncertainty and wild swings in stock and bond markets. More importantly they make important business decisions difficult, no one knows what policies will end up being. Tariffs are the most prominent example. Tuesday there was another huge $69 billion auction of two-year US notes. Because over the weekend and earlier in the day Trump had backed off on the tariff threats against Europe, the stock market soared and bond yields declined, creating a favorable environment for the auction. But the high yield was 3.96%, up from the prior month’s similar auction. Demand was acceptable. These yields on relatively short-term paper are far higher than they were two to three years ago. They are a primary cause of the greatly increased interest burden on the federal budget. If they stay in this range, and there is no sign they will decline, sooner or later Congress will be forced to actually take spending cuts seriously.
Then Wednesday, how about $70 billion (these auction sizes should scare the shit out of everyone, leaving aside very short paper, the US has to sell a couple hundred billion in debt every month and it is only going to get worse) in five-year notes. Demand was outstanding, with record foreign buyers and good domestic participation. Could be that with the tariff threats off and some semblance of normal trade, foreigners have a bunch of dollars to recycle again. But the interest rate, while slightly lower than anticipated, was 4.07%, higher than last month. As I said above the critical big picture takeaway is that our total interest burden is rising extremely rapidly.
The final auction of the week occurred today–$44 in seven-year notes and some described it as a stellar auction. The yield was a little below expected and demand was again excellent. But once again, in what I view as the most important factor, the yield on this auction was higher than the similar one last month. If these auctions are so outstanding, why is a higher interest rate needed to get the debt sold. And if even when demand is strong, you have to pay that higher interest rate, what does that tell you will happen when demand weakens.
