Right out of the gate on Monday another $69 billion added to the debt pile, in two-year notes. Some sources described this as a very good auction; I would disagree, as the interest rate, while a little lower than expected, was 3.58%, a good step up from last month’s auction at 3.5%. While overall demand and foreign buyers were excellent; that excellence was achieved through higher interest payments. The US dollar is weakening, adding currency risk. And now we are seeing a demand for higher interest rates even on the very short end of US debt. With every auction, lower interest rate debt is being replaced with larger amounts at higher rates. Not a good sign for the deficit.
And sure enough things got ugly with the just somewhat longer term five-year note auction on Tuesday. $70 billion was sold at a high interest rate of 3.82%, up from December’s auction and higher than expected. Demand metrics were generally in line with the recent averages, just a little lower, but not showing any signs of overwhelming demand, certainly at lower rates. Rates are rising in the aftermarket. Neither Donald Trump nor the Federal Reserve has any control over interest rates any more and if they want to get control they will have to cut the deficit dramatically and that does not appear likely to happen.
And they stayed a little ugly with the seven-year note auction on Thursday. $44 billion was sold at 4.02% high interest. That again is higher than last month’s rate, which was 3.93% and was higher than expected according to the “when issued” rate. Overall demand was down, but foreign demand was up a bit. Next week we will see some longer-term debt issuance and I would anticipate higher rates in those auctions as well. There will be no change until the deficit is substantially cut. And these higher interest rates themselves add to the deficit and inflation, interest being the price of money.
