Much Ado About Long Bonds

Long-term (20- and 30-year) Treasury yields have bounced around quietly for most of 2023. But with a recent upturn that has them approaching October and November 2022 highs, more folks are noticing—and fretting. Coming in the wake of Fitch’s recent US debt downgrade, this has some suggesting demand isn’t sufficient to keep long rates down, feeding into perpetual US debt fears. But we think a look at recent auctions shows otherwise and illustrates these worries are likely a brick in this bull market’s wall of worry.

While many watch benchmark 10-year Treasury note yields, some also look to long bonds, thinking they are more sensitive to perceptions of far-distant economic conditions. They also tend to have a more institutional investor base with pension funds and insurance companies owning them to match their long-term liabilities. Partly as a result, they aren’t quite as liquid (especially the relatively thinly traded 20-year, which currently yields slightly more than the 30-year) and amount to only 17% of outstanding Treasury debt.^[i] Today, 20- and 30-year Treasury yields are 4.55% and 4.38%—up from 4.06% and 3.88%, respectively, at the year’s start.^[ii]

Long bond yields’ sideways move over the last year seems to mostly reflect an increased acceptance that inflation is slowing. But a couple of issues have prompted concern over long rates’ latest drift higher. At the end of July, the Treasury’s quarterly refunding announcement upped its Q3 borrowing estimate to a record $1 trillion from the $733 billion it expected in early May. This entails extending maturities (issuing more long bonds) and refilling coffers (specifically, the Treasury’s general account) run down during the debt ceiling showdown. Then, a supposedly weak 30-year Treasury auction last Thursday received an inordinate amount of press. Primary dealers—New York Fed counterparties entrusted to make markets in Treasurys—took a bigger share than usual, sparking demand concerns, particularly as the Fed has stepped away from its bond buying.

But it isn’t exactly earthshattering the government is borrowing more after Congress lifted its borrowing limit. Many articles anticipated just that. Meanwhile, the Fed has been letting Treasurys it amassed under quantitative easing roll off its balance sheet since April 2022. None of this is new news to markets. Direct bidders—Treasury buyers for their own account—may have held fire to an extent at August’s auction, but we think it would be dangerous to extrapolate this forward. One month doesn’t make a trend or necessarily signal anything distressing. Auction coverage suggested slack demand boosted rates, which is possible. And, of course, we wouldn’t read into 30-year yields’ one-day move from 4.18% to 4.24%—or pretty much any one-day move.^[iii]

Regardless, last week’s 30-year auction’s bid-to-cover ratio showed overall demand was fine. The dollar amount of bids was 2.42 times the amount sold.^[iv] For context, July’s 30-year auction was 2.43 times oversubscribed, June’s 2.52, May’s 2.43, April’s 2.36, March’s 2.35, February’s 2.25 and January’s 2.45.^[v] So we aren’t looking at figures that show cratering demand or something worse.

Consider the bigger picture, too: Bond inflows have increased as rates have risen.^[vi] Some decry this as showing demand can’t keep rates down, but we mostly see that as backwards: Higher rates seem to be spurring demand. While it may not be equally distributed across the board—e.g., long bonds—rising rates suggest greater demand in time.

We think the minor furor over one auction—largely in line with the others this year—and the barely noticeable yield move accompanying it mostly shows the dog days of summer are still with us. It is a slow news stretch and, given skeptical sentiment, this small story fits the zeitgeist.