Cogito Ergo Non Serviam
US Treasury Auction Disappoints
The US government auctioned off some debt yesterday, and the auction did not go well. Demand was down, interest rates were up, and in general, this could be a harbinger of worse financing issues. It is dangerous to make a trend out of a single datum, but several data do create a trend. The next few auctions will determine just what is going on. By then, however, it is likely going to be too late to reverse any negative trend that does emerge.
Breakingthenews.com reported:
The United States Department of the Treasury auctioned $25 billion in 30-year bonds at a high yield of 4.813%, drawing the weakest demand in nearly two years, according to official results published on Thursday.
The bid-to-cover ratio amounted to 2.27, hitting the lowest level since November 2023. Investor bidding totaled $56.6 billion for the available $25 billion in securities. Primary dealers made up $4.3 billion of accepted bids, or roughly 17%. Meanwhile, direct and indirect bidders accounted for $20.5 billion of accepted bids, or around 82%.
In other words, the US government had to pay more to borrow this money than it did in previous auctions. That is what the high yield means. The bid-to-cover simply compares the total value of bids received to the total value of bids filled. That means that for every dollar in debt offered, there were $2.27 bid. A great many of those bids were out of the money, but the decline is notable.
CNBC cited "Deutsche Bank analysts said the ISM data was 'worrisome.' They added that it 'raised renewed concerns that tariffs were pushing the U.S. economy in a more stagflationary direction, complicating the Fed's job in the process'."
There is a saying on Wall Street that the dumb money is in stocks while the smart money is in bonds. It is usually said by bond traders. However, there is some truth to it. When buying a stock, one is interested in the potential increase in the price and turning a profit. When buying a bond, one is concerned with the safety of the investment, and so one is more focused on the observable risks rather than the possible rewards. Consequently, the bond market is where the fears of investors are addressed while the greed is over in the stock markets.
The smart money yesterday was prepared to lend the US Treasury more money, but at a higher price. That means that the smart money sees greater risk than before in lending to the federal government. Mr. Trump is engaging in a re-jigging of the global economy and trading system. His people and his opponents agree on this. No matter whether the goal is noble or otherwise is irrelevant to the discussion here. There will be a short-term disarray at bare minimum. Even if everything Mr. Trump wants to do were to happen, there would be a period of dysfunction. This journal believes that this weak auction was a sign of that dysfunction.
A great many things can change between now and the next several auctions that could reverse this weakness. A peace announcement in Gaza or Ukraine, for instance, would probably see some faith restored. At the same time, the US Treasuries are a safe haven investment, so peace could undermine demand as easily as it could increase it. The point is that the future is uncertain enough that one does not want to make predictions as to what happens next. But the canary in the coal mine is starting to squawk.
© Copyright 2025 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.
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