US long-dated debt faces crucial test in $22 billion auction
(Bloomberg) — After weeks of hand-wringing around demand for long-term US debt, all eyes are on Thursday's 30-year Treasury (^TYX) auction for a fresh read on whether spiraling deficits are causing investors to shun the maturity.
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The $22 billion sale, scheduled for 1 p.m. New York time, is part of the government's regularly scheduled borrowings. Yet it will take place as Congress considers President Donald Trump's massive tax bill, which by some projections will add trillions of dollars to US budget gaps, potentially requiring more bond issuance to finance the spending.
That backdrop, along with worries that the president's trade war threatens to reignite inflation and dim global demand for US assets broadly, has punished the longest-maturity Treasuries in particular. Investors have grown more wary of lending to the US government for such a long time, and have demanded higher yields as a result, increasing a cushion known as the term premium.
A surprisingly poor reception for last month's 20-year auction contributed to a bond selloff that pushed 30-year rates as high as 5.15% in May, leaving them just shy of an almost two-decade high and sparking losses in stocks and the dollar. The previous 30-year sale, last month, also saw somewhat weak demand.
'Given what occurred with the 20-year a couple of weeks ago, there will be heightened interest, especially for the 30-year,' said Kevin Flanagan, head of fixed-income strategy at WisdomTree.
Underlying US inflation rose in May by less than forecast, data showed Wednesday. The figures spurred gains in Treasuries that were led by shorter maturities as traders boosted bets on Federal Reserve interest-rate cuts this year. Strong buying at a 10-year Treasury (^TNX) auction helped fuel the advance.
However, inflation remains above the Fed's 2% target, and policymakers have signaled that they're waiting to see how much tariffs lift consumer inflation before they ease rates further. The long bond is particularly vulnerable to the threat of resurgent price pressures.
Amid all these risks, bond managers including DoubleLine Capital and Pacific Investment Management Co, have favored owning Treasuries with 10 or fewer years to maturity, while allocating less to the long end.
This week, Pimco reiterated that it's staying underweight long-maturity debt over the next half-decade, while DoubleLine's Jeffrey Gundlach said long-term Treasuries are no longer seen as legitimate risk-free investments.
Ahead of Thursday's auction, which is a reopening and is $3 billion less than May's offering of the maturity, the 30-year yielded around 4.9%. That's more than a half-point above its early April low, when US tariffs were starting to roil markets.
Since peaking in May, the yield has settled into a range that suggests 5% is attracting buyers, and that level is seen as a ceiling heading into the auction.
'There is a 5% threshold that does garner investor demand,' Gregory Peters, co-chief investment officer at PGIM Fixed Income, told Bloomberg TV.
'I see the long end trading cheap for quite some time,' he said. 'The point is that there is so much debt that needs to get refinanced and financed, and that does not include the additional debt' coming from the tax bill before Congress.
Of note, US customs duties brought in record revenue in May, helping shrink the federal budget shortfall for the month.
Guneet Dhingra, head of US rates strategy at BNP Paribas SA (BNPQF), sees a case for buying the 30-year around current levels, on the view that it already reflects the worsening fiscal picture and could rebound on strong auction demand or if deficit fears ease.
There's also the network of primary dealers that are required to bid at auctions, which will serve as a backstop should investors steer clear on Thursday.
The focus will be on demand metrics for the sale, and where its yield clears relative to the pre-auction bidding deadline. A breakdown of domestic- and foreign-based buyers will be released later this month.
'There's a lot of debt to come and so we're obsessively watching the auction stats to see if we get the signals that people are leaving,' said David Hoag, a fixed-income portfolio manager at Capital Group.
'We're watching it very closely because one of the mechanisms for term premium to rise is if the non-US buyer starts to exit this market — or not even exit, but just kind of stop and slow the buying trajectory.'
—With assistance from Alice Gledhill and Sujata Rao.
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