The Treasury Has to Sell $119 Billion of Bonds This Week at the Highest Yields Since 2002
The government needs buyers for a massive wall of long-term debt at borrowing costs not seen in over two decades, and weak demand at even one auction could deepen losses already punishing bond holders. Watch which buyers show up and…
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The U.S. government must find buyers for $119 billion of debt at borrowing costs unseen since 2002. Three long-term Treasury auctions run October 6 through October 8. The ten-year yield touched 5.33% on October 1, above its 2007 peak.
Long-bond holders are being asked to absorb that supply into an inventory that is already showing losses. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) closed at $77.11 on October 5 after a 0.48% drop. That leaves it down 8.44% year to date and 36.13% over five years.
Three Sales Carrying Very Different Risk
The U.S. Treasury is holding three auctions. It is selling $58 billion of three-year notes on October 6, $39 billion of ten-year notes on October 7, and $22 billion of thirty-year bonds on October 8. The last two are reopenings, meaning the Treasury sells more of an existing security with the same coupon and maturity.
Short-term paper finds buyers easily because duration risk is small. A thirty-year bond loses far more than a three-year note when yields move, so demand problems show up at the long end first.
What Drove Yields to Multi-Decade Highs
Core PCE, the Federal Reserve’s preferred inflation gauge, rose 0.2% in August, and the Fed’s upper target rate rose to 4.00% from 3.75%. Neither points to near-term rate relief.
When supply meets thinner demand, auctions clear at higher yields, lowering prices on all outstanding bonds. The ten-year was at 5.315% and the thirty-year at 5.670% at the October 5 close, according to TheStreet.
The September 24 seven-year sale drew a bid-to-cover of 2.42 against a 2.49 average, and indirect bidders took 57.2% against a 64.6% average. Indirect bidders include foreign central banks and overseas buyers.
One weak auction is noise, but two in a row would be a trend.
Two Paths for Long-Bond Holders
A weak result drives yields higher and adds to losses in TLT, already down 5.83% in a month. A tail (a sale clearing at a higher yield than expected) is the clearest warning sign. Fed minutes are due during the same period. A strong indirect share at the thirty-year reopening would signal buyers coming back at these yields, though those minutes could move the market the other way.
TLT likely carries more duration risk than its yield justifies right now, since a fund never matures and holders never get paid back at face value as they would with an individual bond. With supply coming and rates rising, 5.670% on the thirty-year does not pay enough for open-ended duration risk.
Shorter Treasuries or a ladder of bills carry less duration risk. On October 5, the three-year yielded 4.97% and the one-year 4.47%. Those maturities give up income but carry far less price risk and allow reinvestment at higher rates if yields keep going up.
The case for long bonds could improve. That would likely happen if the October 8 reopening clears with indirect bidders above 57.2% and the thirty-year yield drops below 5.61%. If both happen, buyers are coming back to the long end.
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Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.