Bond Flood Fears Look False

Before early June’s debt-ceiling deal, fearful headlines far and wide argued investors concerned over US default would drive rates north—demanding more compensation to lend the government money, especially for short-term bills most at risk of a missed payment. So when politicians struck a deal, you might think most commentators would have found comfort. Nope. Many then turned to arguing the deal would drive rates higher as Treasury caught up for lost time, issued a slew of bonds and overwhelmed buyers with new supply. We covered this worry just after the deal, when the Treasury’s first couple of auctions finished, noting there was no sign in these early auctions this was true. Today we have more evidence—and there is still no sign that issuance is spiking interest rates. This, in our view, is a classic fear morph—part of the pessimism of disbelief so common in early bull markets. Let us show you.

First, to be clear: We don’t plan to keep writing about 2023’s debt-ceiling fight ad nauseam. We realize it is over and that people aren’t very worried about 2025 … yet. But, as Elisabeth Dellinger and Todd Bliman wrote on these pages recently, the debt ceiling isn’t likely to go anywhere. And the fears that come with it are so repetitive, so much the same, so at, so much the same, so repetitive—you get the point.

So with that in mind, let us review the overall change in US Treasury yields before the deal (May 31) and after (June 22). Exhibit 1 does so, plotting the entire US yield curve—all yields across maturities from one issuer—on those two dates.

Exhibit 1: US Treasury Yield Curve, Before and After Debt-Ceiling Deal

Source: FactSet, as of 6/23/2023. US Treasury Constant Maturity Yields, 5/31/2023 and 6/22/2023.

As you can see, yields on the short end (up to six months) have slightly fallen. Medium-term maturity yields, like the 5-year and 7-year, are up slightly. The longest maturities are basically unchanged.

If you read that and concluded there is no pattern, no there! there, you are correct, in our view. The fall in the shortest yields is interesting, though. Consider it in light of theories that supply would overwhelm buyers: The vast majority of the debt sold since the deal is in this very short-term window—the Treasury has sold $867 billion worth of bills with maturities less than six months since early June.^[i] Yet yields are overall down ever so slightly and bid-to-cover ratios—a measure of demand comparing the amount of debt investors bid for versus the amount sold—have been strong, averaging 2.97.^[ii] That undercuts the notion issuance would swamp demand pretty directly.

Furthermore, for the yields that are up a bit—mostly those ranging between 2-year and 20-year maturities—there has been just one auction ($32 billion of 10-year notes), suggesting a supply surge isn’t the cause.^[iii] Overall, we would suggest the data prove the bond flood fears false—another example of pessimism seeing everything through dark-colored glasses.