Tepid demand for US Treasury auction shows investor jitters about tax bill, deficit
"Either the U.S. has to sharply revise the current reconciliation bill currently sitting in Congress to result in credibly tighter fiscal policy; or, the non-dollar value of U.S. debt has to decline materially until it becomes cheap enough for foreign investors to return," Deutsche Bank FX analyst George Saravelos said in a report sent after the auction.
The three major U.S. stock indexes posted their biggest drops since April 21 on Wednesday. Benchmark 10-year Treasury yields reached 4.607%, the highest since February 13.
"The markets, or at least the marginal traders, are very much concerned about how supply will affect the clearing levels for longer-term Treasuries," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
"Ultimately, I believe that the U.S. interest rate markets are dominated by economic conditions more than supply," and yields will likely decline this year with a weakening economy, LeBas said. "But for the moment, it's just not time to step in front of that particular freight train."
A handful of hardline U.S. House of Representatives Republicans, concerned that President Donald Trump's tax cut bill does not sufficiently cut spending, were headed to the White House on Wednesday.
The Committee for a Responsible Federal Budget, a nonpartisan think tank, estimates the bill could add roughly $3.3 trillion to the country's debt by 2034, or around $5.2 trillion if policymakers extend temporary provisions.
At the same time, investors fear that Trump's back-and-forth tariff policies will not only stoke inflationary pressures but also erode the appeal of U.S. assets. This week, yields in Japan and the euro zone, too, have risen.
Longer-dated Treasuries took the brunt of bond market weakness after Trump on April 2 announced larger-than-expected tariffs on trading partners, as well as being hurt by fiscal concerns.
While the U.S. Treasury Department in April said it expects to keep auction sizes steady for at least the next several quarters, analysts expect the U.S. government will need to increase the size of its longer-dated debt auctions at some point, most likely early next year, to fund the expanding budget deficit.
The 20-year bonds typically see less demand than other maturities, including the benchmark 10-year notes and 30-year bonds, which are favored by life insurance companies and pension funds.
The maturity was reintroduced in May 2020 following a hiatus since 1986.
(Reporting by Karen Brettell; Additional reporting by Chuck Mikolajczak and Davide Barbuscia; Editing by Megan Davies and Andrea Ricci)
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