Review Article - ROI - For Trump's Treasury, the "tail" of the auction is the toughest part: McKeever
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Jamie McGeever
Reuters Orlando, Florida, October 6 - U.S. Treasury auctions are supposed to be routine, predictable, and devoid of newsworthiness. But these are not ordinary times, and the Trump administration now faces the risk of weak Treasury sales making headlines.
The U.S. Treasury plans to issue nearly $120 billion in bonds this week, marking the first auctions beyond short-term Treasury bills in two weeks: $58 billion in three-year notes on Tuesday, $39 billion in ten-year notes on Wednesday, and $22 billion in thirty-year bonds on Thursday.
These auctions would normally attract little attention, but they are under increased scrutiny following abnormally weak results in the sales from September 22-24—especially the five-year Treasury auction on September 23, which triggered the largest jump in bond yields since April last year. Since then, yields have not only failed to retreat but have instead soared to decades-high levels across most maturities.
Importantly, the likelihood of a “failed” U.S. Treasury auction is nearly zero. Primary dealers—currently 26 banks and institutions approved by the New York Fed for Treasury market-making on Wall Street—are always there to participate. They effectively underwrite the sales, ensuring the smooth operation of the $30 trillion U.S. Treasury market, the most liquid on the planet.
This, in turn, keeps the entire global financial system functioning. Trillions of dollars in global debt, assets, and market derivatives are benchmarked to U.S. Treasuries. U.S. Treasuries also serve as collateral greasing the “pipes” of U.S. and global finance—through repos, interbank lending, and financing transactions.
In short, as long as U.S. Treasuries remain the cornerstone of the global financial system, there will always be buyers at Treasury auctions. The question, as always, is at what price those bonds are sold. Currently, borrowing costs in the secondary market are at their highest since the mid-2000s, so there’s every reason to believe the Treasury will be paying comparatively higher rates in the primary market as well.
But as recent auctions have shown, negative surprises remain possible.
“Too Big for the Market to Digest”?
The $70 billion five-year Treasury auction on September 23 was one of the most concerning in recent years. Demand, as measured by the “bid-to-cover ratio,” was the lowest in nine years. The Treasury ultimately sold those bonds at a 5.033% yield, more than three basis points above the market yield at the bidding deadline.
Three basis points may not sound like much, but for a five-year Treasury auction, it’s significant. It’s the largest so-called “tail” since June 2022. J.P. Morgan analysts noted that the last time a three-basis-point “tail” occurred in a five-year auction was back in 2011—when a brewing debt ceiling crisis eventually led to a U.S. credit rating downgrade that August.
Looking ahead, concerns over the U.S.’s grim fiscal outlook have pushed up long-term borrowing costs. Therefore, markets widely expect the Trump administration to shift the Treasury’s massive funding needs towards the lower—hence less costly—end of the yield curve.
This is why the five-year auction two weeks ago caused such concern. A three-basis-point “tail” is common in long-term bond auctions but rare in the so-called “belly” of the curve. If the Treasury is forced to pay higher premiums for this segment, then Houston, we have a problem.
A large auction “tail” can be caused by various factors, including market volatility on the day or more worrisome fundamental issues—dynamics that may erode demand over time. It’s often hard to distinguish between the two, as they’re not mutually exclusive.
On a more optimistic note, the unease hasn’t yet spread to the short end of the yield curve—or at least not for now.
Three-year and ten-year Treasury yields are up about 50 basis points from the previous month’s auctions, hovering around 4.96% and 5.32%, respectively. The thirty-year yield has risen about 35 basis points to 5.65%. That level should be high enough to attract solid demand and ensure successful sales, right?
Probably, but if there’s an unexpected twist, volatility and uncertainty could ripple through the entire market. Investors will be watching developments as closely as…hawks.
(The views expressed are solely those of the author, a Reuters columnist.)
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