Kind of a big week for the debt auctions, lot of economic news being released, including supposedly weak retail sales this morning. First off on Tuesday was the $58 billion three-year note auction, which priced at a lower interest rate, 3.52%, than in January, at 3.61%. But overall demand was slightly lower than typical and foreign demand was down, while domestic buyers stepped up to fill the gap. One trend to keep an eye on is whether foreign demand declines and domestic buyers continue to bid at lower rates, or demand higher rates. The shorter term auctions are the least impacted about concerns regarding the deficit and debt level, so the other auctions this week will be more telling.
And sure enough on Wednesday a dreadful ten-year note auction. This security is the one most tracked. The interest rate was 4.18% on the $42 billion of notes sold, slightly higher than last month, but also higher than expected. Total demand was weak and the dealers who backstop these auctions were left with a much larger than normal allocation. Foreign buying was also weak. The auction could have been affected by the better than anticipated jobs report earlier today, which changed rate cut expectations. Or as I keep pointing out, buyers are nervous about the US’ financial condition ten years out.
And much to my surprise, the week finished off with a thirty-year bond auction that went just fine. $25 billion went at a high interest rate of 4.75%, down significantly from January’s 4.82% and lower than expected. Overall demand was higher than the average and both foreign and domestic buyers took higher than average proportions of the auction. I can only surmise that buyers thought the jobs numbers weren’t great and expect a low inflation number tomorrow. But I have given up trying to really understand the bond market. But let me also note that one of the big buyers, apparently for $7.1 billion of the auction, was the Federal Reserve’s System Open Market Account. That account also purchased a lot of the ten-year note auction. So it looks like the Fed is manipulating, er, managing, interest rates. That account has well over $3 trillion in US debt. How about we let the free market determine what rates should be?
