On May 21, the U.S. Treasury Department experienced weak demand for a $16 billion sale of 20-year bonds. This lackluster interest comes as investors express concerns over the country's escalating debt burden, highlighted by ongoing debates in Congress surrounding a tax and spending bill that is likely to exacerbate the fiscal outlook. The disappointing auction reflected broader investor anxieties regarding the nation's growing debt, potentially prompting bond market vigilantes to advocate for greater fiscal discipline from Washington.
The poorly received auction resulted in a sell-off in both stocks and the dollar, while U.S. Treasury yields rose. Moody’s recently downgraded the United States’ sovereign rating from the top Aaa, adding to prior downgrades from Fitch Ratings and Standard & Poor’s. Republicans are currently striving for consensus on a tax-and-spending bill projected to increase the country's debt by trillions. Tom di Galoma, managing director at Mischler Financial Group, remarked, “We have a legacy deficit problem and it doesn't seem to be going away… there's just too much debt out there.”
The auction resulted in debt being sold at a high yield of 5.047%, approximately one basis point above its previous trading levels. Notably, indirect bidders, which may include foreign governments, fund managers, and insurance companies, acquired an above-average portion of the sale at 69%, suggesting solid foreign demand. However, overall demand fell slightly below average at 2.46 times the amount of debt offered, marking the weakest demand since February. Following the auction, yields on the 20-year debt surged to 5.127%, the highest level since November 2023.
Economic experts are voicing concerns about the implications of ongoing U.S. budget deficits. George Cipolloni, portfolio manager at Penn Mutual Asset Management, stated, “(Long-term) yields of 5% with another auction not doing well is not a sign people are feeling good about the U.S. economy.” This sentiment reflects broader worries that the tax and spending bill in Congress will worsen the deficit more rapidly than anticipated. Deutsche Bank FX analyst George Saravelos outlined two potential paths: a significant revision of the current reconciliation bill to achieve tighter fiscal policy or a material decline in the non-dollar value of U.S. debt, making it attractive for foreign investors.
On the same day as the auction, the three major U.S. stock indexes recorded their largest declines since April 21, while benchmark 10-year Treasury yields hit 4.607%, the highest since February 13. Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, noted that market participants are increasingly concerned about how supply dynamics will influence clearing levels for longer-term Treasuries. He emphasized, “Ultimately, I believe that the U.S. interest rate markets are dominated by economic conditions more than supply.”
Amid ongoing fiscal concerns, analysts predict that the U.S. government may need to increase the size of its longer-dated debt auctions, likely starting early next year, to adequately fund the expanding budget deficit. Historically, 20-year bonds attract less demand compared to other maturities such as the benchmark 10-year notes and 30-year bonds, which are preferred by institutional investors like life insurance companies and pension funds.
The maturity of 20-year bonds was reintroduced in May 2020 after a hiatus since 1986, and it has since faced a mixed reception in the market. As the U.S. grapples with fiscal challenges and potential policy changes, the demand for these bonds will remain a key indicator of investor sentiment toward the nation's fiscal health.
Reporting by Karen Brettell; Additional reporting by Chuck Mikolajczak and Davide Barbuscia; Editing by Megan Davies and Andrea Ricci.
