Wall Street looks past US deficit concerns for now as investors snap up bonds
Wall Street breathed a sigh of relief Thursday after a key bond auction eased concerns that the US economy might be falling out of favor with investors.
Bonds rallied after an auction for US government bonds saw relatively strong demand. The Treasury on Thursday sold $22 billion worth of 30-year bonds. The auction settled with a yield of about 4.84%, signaling solid buying.
Standard, boring bond auctions have drawn the attention of investors around the globe. The auctions serve as a gauge of investors' appetite for holding US debt as lawmakers debate President Donald Trump's massive bill, which is set to add to the federal debt burden. All eyes have been on whether there is weak demand for long-term debt, particularly from foreign investors.
'The 30-year auction just went very well,' Chip Hughey, managing director for fixed income at Truist Advisory Services, told CNN.
There was relatively strong demand from foreign investors, Hughey said, soothing nerves about whether they might be shunning US bonds.
Foreign investors bought about 65.2% of the bonds sold at the auction, according to Treasury Department data, up from 58.9% at the auction in May. Demand from foreign investors was the strongest it has been since January and hovered around the one-year average.
Collin Martin, a fixed income strategist at Charles Schwab, told CNN that the uptick suggests foreign demand for long-term US assets remains strong despite concerns about foreign investors potentially selling Treasuries and nerves about the rising deficit likely resulting from Trump's mega bill.
'This was a good confidence boost for those worried about declining demand for US Treasuries,' Martin said.
Truist's Hughey said the solid auction results showed that at least for now, investors are not overly panicked about federal budget negotiations in Congress or the deficit.
'Over the long term, our deficits and reliance on debt are going to have to be addressed,' Hughey said. 'For the time being, it is encouraging to see investors still seeking out US Treasuries for their haven assets.'
The auction followed a similarly strong auction for 10-year Treasuries on Wednesday.
The Treasury auction also came after two inflation reports that showed the effect of tariffs has so far been muted. That increases the likelihood the Federal Reserve can consider cutting interest rates later in the year, which is a signal for investors to buy bonds now to lock in current rates, helping bring down yields.
The 30-year yield settled on Thursday around 4.84% and the 10-year yield settled around 4.36%. Both fell across the day as investors snapped up bonds.
The 30-year Treasury auction, which is a regularly scheduled event, has become a closely watched barometer for how Wall Street is feeling about the Trump administration's policy agenda.
When there is strong demand for bonds, prices rise and yields fall. Vice versa, when there is weak demand for bonds, prices fall and yields rise. Higher yields would squeeze the government with higher borrowing costs. Treasury yields are also benchmark interest rates for the economy, and higher yields can mean higher borrowing costs for consumers on everyday items including auto loans and credit cards.
Long-term US debt, which is usually considered the safe, risk-free corner of the market, has come under scrutiny as Trump's bill is set to add to increase federal deficits.
'The idea that the US fiscal position is unsustainable over the long run has been frequently noted for years, but it has taken the current set of circumstances to get market participants to begin pushing back,' John Canavan, lead US analyst at Oxford Economics, said in a Wednesday note.
Yields on 30-year Treasury bonds have soared this year as investors have demanded more compensation for what is looking like a riskier long-term loan to the US government. These concerns were exacerbated in May after Moody's downgraded the US, stripping the nation of its last perfect credit rating.
'The Moody's downgrade occurred as the ability to easily finance growing deficits increasingly comes into question,' Canavan said. 'Trump's tariff decisions are likely to raise inflation over the near term, while lowering economic growth and leading foreign investors to question the safe-haven allure of Treasury debt.'
In May, the 30-year yield spiked above 5% and hit its highest level since 2023 after a Treasury auction for 20-year bonds that saw weak demand.
There is robust demand for shorter-term Treasuries like 10-year bonds, according to Hughey. An auction for 10-year Treasuries on Wednesday saw strong demand from both domestic and global investors.
Yet investors in recent weeks had shown hesitancy about longer-duration bonds like the 30-year bond, Hughey said. Investors have been increasingly uncertain about the long-term outlook for the US debt burden, giving them pause about the risk associated with loaning money to the government over a longer period.
'The 30-year reflects the uncertainties around those more structural questions around budget deficits and the US debt load going forward,' Hughey said.
Pacific Investment Management Company, a global fixed income firm, said in a Tuesday report that bonds still look relatively attractive and affordable compared to stocks. However, Pimco expects to focus and be 'overweight' to 5- and 10-year bonds, while being less focused and 'underweight' to longer-term bonds.
Martin at Charles Schwab said that while concerns about the deficit linger, investors are also assessing factors like inflation and the path of potential Federal Reserve rate cuts.
'We still find yields pretty attractive, and our outlook on the safety of US Treasuries hasn't changed,' Martin said.
Elsewhere in markets, US stocks gained on Thursday as investors tried to digest recent trade developments. The United States and China have de-escalated tensions, but Trump's tariffs still remain a headwind to economic growth.
The Dow closed higher by 102 points, or 0.24%. The broader S&P 500 rose 0.38% and the tech-heavy Nasdaq Composite gained 0.24%.
The S&P 500 is hovering near an all-time high, but had stalled in recent trading sessions and was coming off a day in the red. The benchmark index is about 1.6% away from a record high.
The Dow was weighed down by Boeing (BA), which sank 4.79% after a Boeing 787-8 Dreamliner carrying 242 people crashed in India on Thursday. At least 290 people are dead, health officials said. The plane hit a hostel for doctors when it crashed.
The US dollar broadly weakened on Thursday as investors wrestle with continued tariff uncertainty. The US dollar index, which measures the dollar's strength against six major foreign currencies, tumbled 0.72% and fell to its lowest level since 2022.
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