The issues with the Iran conflict and its impact on oil prices and other downstream economic effects are roiling markets, particularly bond markets with the uncertainty about inflation expectations. So it will be no surprise that it also affects US debt auctions. And it apparently has starting with Tuesday’s $69 billion in two-year notes. This was a truly bad auction, on all counts. The high interest rate was 3.94%, compared to 3.46% last month. That is a mammoth swing. It was also higher than expected. Overall demand sucked, far lower than average, and domestic buyers basically disappeared, although foreign buying held up. Going to be a wild week.
And…Wednesday brought an even worse five-year note auction, $70 billion worth sold at a high interest rate of 3.97%, up from 3.61% last month. Of course, the buyers may be happy with the higher interest payments. Overall demand was the worst in four years, but foreign demand continues to hold up, or more realistically, the foreign buyers are happy to buy at a higher interest rate and domestic buyers want an even higher rate before they will buy. Inflation fears are running amok.
The week ended liked it started, with a bad auction. Been a long time since there has been a set of auctions this bad, particularly on the shorter end. $44 billion in 7 year notes sold at a high rate of 4.26% up mammothly from last month’s 3.79%. That is a huge one month jump. Overall demand was fairly poor, but foreign and domestic demand was close to recent averages. I wouldn’t over-react to these auctions, the Iran conflict has created tremendous uncertainty about inflation and other risks. But it doesn’t help our deficit situation to have these kinds of interest rates and resultant interest payments.
