Busy week, kicked off with Tuesday’s sale of $58 billion in 3 year notes. Again, puzzling to me but some called it a good auction. The reality is that the interest rate needed to sell these notes was 4.47%, up sharply from last months 4.29%. Overall demand was a little higher than recent averages. Foreign buying was a little weak, but domestic buyers were very strong. The clear dynamic across recent auctions is that if the interest rate goes up there is strong demand.
Wednesday was more of the same, $39 billion of the key ten-year note, also described as a good auction, but only because demand was strong for the very high interest rate. If the ultimate interest rate were lower, demand would have been weak. And the high yield was 4.83%, once more up substantially from the prior month at 4.68%. That is a big jump in a month and the highest rate in twenty years. Buyers responded with above average overall demand, the highest in 10 years. And unlike the three year auction, for this one the foreign buyers took an bigger than usual portion of the auction. We can keep paying higher rates and get good demand for our debt, but all we are doing is making the deficit bigger due to interest payments and then selling even more debt to fund the deficits.
And the same dynamic on Friday for the $22 billion 30-year bond sale. Once more we saw the highest yield in 25 years, 5.31%, up from 5.21% last month, although slightly lower than anticipated. And investors were happy to bid for the bonds at that high rate; with both overall and foreign demand being above recent averages. The message continues to be that investors are happy to buy US debt as long as the interest rate keeps going up.
