Now that Dems are in control of Congress everything will be great, right? Apparently the bond market doesn’t think so, correctly perceiving that Dems will attempt to go on a spending binge while wreaking havoc on the economy. And this week’s auctions, the first after the elections, will reflect that concern.
On Monday we had the first shot fired. A $58 billion three-year auction was pretty much a disaster. The high yield of 4.63%, which substantially below last month’s 4.93%, was above expectations. Demand was the bigger issue. Overall demand was the lowest in over a year and foreign demand tanked. Domestic buyers stepped in, but the apparent loss of confidence by foreign investors in even our short-term debt will be an issue.
More bad action on Tuesday as a $ ten year note auction priced at a high yield of 5.02%, lower than last month, but higher than expected and putting this security back above 5% for the first time in a few weeks. Total demand and foreign demand was very weak. As yesterday’s auction also showed, it is unlikely that foreign buyers will return in force until rates go much higher or they see just how crazy the Dems in Congress will be. After this week’s inflation report, it seems unlikely rates will head down anytime soon.
And why should Thursday be any different? A $25 billion 30-year bond auction did not go well, even though the high yield of 5.44% was down slightly from last month’s 5.62%, but higher than expected. These ongoing yields above 5% are inhibiting economic activity, including home sales. Overall demand was lower than average and foreign buyers were slightly lower as a percent of the auction. The US debt market is struggling, the Federal Reserve is going to feel compelled to raise rates due to inflation, the higher interest rates on new US debt add to our deficits; it is all a mess right now.
