Not much going on this week in the longer term debt instruments. $16 billion in 20-year notes auctioned on Wednesday. The high interest rate was 4.67%, down a good bit from January’s 4.85% for this series, but higher than expected. The overall demand was quite weak, much lower than the recent average, and foreign demand plummeted as well, while domestic buying was average. Some commentators described the auction as bad, but the interest rate is moving in the right direction, although the after-market reacted by having rates move higher.
Only other auction was a $9 billion 30 year inflation protected bond today. It too had a higher than recent average real rate, which gives a sense of what investors need over inflation to feel comfortable, and that tells you something about how they perceive the riskiness of US debt. When the real rate rises, it isn’t a good signal. Demand was strong, but why wouldn’t it be when you are getting a real return of 2.47% on supposedly the world’s safest investment. Looking at the current after market yield on the regular 30 year bond tells us that investors are expecting inflation of about 2.25% annually averaged over the 30-year period. That is way too low, I assure you.
