Market Focuses on the "Least Popular" Bonds as US Treasury Auctions Become a Key Highlight
This week, the US Treasury bond auction, which is part of the regular financing arrangement, unexpectedly gained the spotlight on Wall Street due to a weakened demand for long-term bonds. The US Treasury plans to auction $22 billion in 30-year Treasury bonds on Thursday, which some analysts refer to as the "least popular bonds."
Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, pointed out, "All auctions will be scrutinized from a sentiment perspective, and the 30-year Treasuries are particularly special, with their market acceptance declining."
Long-term Bond Yields Surge as Investors Demand Higher Returns
In recent weeks, global long-term bond yields have risen significantly. The yield on the US 30-year Treasury bond climbed to 5.15% last month, reaching a nearly 20-year high; although the latest yield has slightly decreased to 4.94%, it remains more than 50 basis points higher than it was in March. Analysts believe this change reflects escalating market concerns about the US fiscal situation.
Amid the government's continued expansion of fiscal spending and increasing borrowing needs, some investors are demanding higher risk premiums to compensate for the potential risks of holding long-term US Treasuries.
US Deficit Expands, Rating Pressure Raises Concerns
According to estimates by the US Congressional Budget Office, the version of the Trump tax and spending bill passed by the House is projected to push the budget deficit up by $2.42 trillion over the next decade. Credit rating agency Moody’s downgraded the US credit rating last month, further raising market concerns about the sustainability of the US fiscal situation.
"Our fiscal trends are worrying," said Fred Hoffman, a finance professor at Rutgers University and former fund manager. He revealed that he would keep an eye on the auction results while vacationing in Martha's Vineyard, focusing on the spread between the winning yields and the pre-issue yields, as well as the level of foreign participation.
Auction Mechanism Tightly Regulated, but Risk Warnings Cannot Be Ignored
While there is currently no concern about the auction going "unbid," investors generally believe that if the winning yields significantly exceed market expectations or the bid-to-cover ratios are exceptionally low, it would indicate severely weak market demand. Hoffman warned, "If this pattern continues in future auctions, our debt market could face substantial challenges."
The May 21 auction for 20-year Treasuries has already triggered a significant jump in yields, and similar conditions for the 30-year Treasuries could have even deeper consequences.
High Yield Temptation Still Present
Despite the generally cautious market attitude, with yields approaching the 5% level, some institutional investors find long-term US Treasuries to be increasingly attractive. McIntyre disclosed that Brandywine has recently entered the market at high yields, suggesting some buyers may be ready to act.
Additionally, this week, the US Treasury will conduct two other Treasury auctions: a $58 billion issuance of 3-year Treasuries on Tuesday and a $39 billion auction of 10-year Treasuries on Wednesday.
