This will be an interesting week. It started right away on Monday with an auction of $58 billion in three-year notes. The interest rate, 3.58%, was essentially identical to last month’s similar auction, despite the Federal Reserve’s rate cut. This rate was a little lower than expected. Demand was quite good, including from foreign buyers. This shorter term auctions should do well, as they have lower risk characteristics. The longer auctions over the remainder of this week and next week will be more telling about investor perspectives on the risk of holding US debt for an extended time.
Wednesday had a $42 billion auction of ten-year notes. The high interest rate, 4.07%, was lower than last month’s auction. Demand, however, was weaker than usual in the aggregate and among foreign buyers. This supports the trend we appear to be seeing whereby there is good demand for short-term US debt but when you get out even to medium term, there is more buyer hesitation. There was some positive news on inflation today and that may have influenced the interest rate bid by buyers. The aftermarket rates were generally down as well, also likely reflecting that inflation news.
And consistent with the theme that the longer-term debt is where buyers are very reluctant, a truly bad 30-year bond auction today. $25 billion in face value sold, the interest rate, 4.69% slightly higher than last month, but well above the when-issued, or nominal, interest rate. Overall demand was weak, foreign buyers were at usual levels, but domestic buyers bailed out big time and primary dealers were left holding a significant portion of the offering. The after-market spiked up in rates, down in price, before and after the auction. As I said, there is legitimate concern about the risks of holding very long-term US debt.
