The US Treasury drew strong demand for its newest 20-year bond on Wednesday, underscoring its ability to fund the government’s record-setting spending packages at historically low interest rates.
For its first 20-year bond auction since 1986, the department was able to offload $20bn of the revived securities at a yield of 1.22 per cent — roughly 0.2 percentage points below where the 30-year bond currently trades. Total public bids far outpaced what was on offer, topping $50bn.
“The market is still able to absorb a lot of supply,” said Kathy Jones, chief fixed-income strategist at Charles Schwab.
The new issue came as the US significantly ramps up its borrowing via longer-term debt in order to finance unprecedented government spending to mitigate the economic damage caused by the coronavirus pandemic.
Earlier this month, the Treasury said it would need to borrow $3tn before the end of June, an unprecedented sum that is almost triple what the department borrowed for the entirety of the 2019 fiscal year. To fund this, the agency said it would boost the size of its auctions of three, 10 and 30-year bonds to record amounts, while at the same time leaning heavily on Treasury bills that mature in one year or less.
The department also earmarked a further $677bn in borrowing needs for the three months to September, but that number may rise given Congress is considering yet another $3tn in further spending, say analysts.
Financial markets have so far had little difficulty in digesting the supply, with Treasury yields ticking slightly higher but still hovering close to record lows. The 10-year note now trades at 0.67 per cent, roughly 1 percentage point lower than where it began the year. The yield on two-year Treasuries sits at 0.16 per cent, just shy of its record low. Yields fall when prices rise.
“There is a seemingly insatiable demand for US dollar debt,” said Brian Levitt, global market strategist at Invesco. “There is little to suggest that the Treasury will have any issue funding [the government].”
The Federal Reserve has played a central role in keeping a lid on yields, investors say, given its significant interventions in the market since it promised to buy an unlimited quantity of government debt. It has the capacity to buy up to 70 per cent of the total amount outstanding of any Treasury security, and on Wednesday the Fed picked up roughly $2bn of the new bonds.
The US central bank has scaled back its purchases since the worst of the market turmoil triggered by the pandemic, having at the peak bought at a pace of $75bn Treasuries a day. Now, it is purchasing an average of $6bn a day. That is still a significant sum, analysts noted, though the potential remains for yields to back up somewhat as the economic backdrop improves, the Fed further tapers its purchases and the Treasury continues to flood the market with new securities.
Still, with deflation risks elevated, Mr Levitt said that outcome is not a near-term concern. “I wouldn’t expect rates to go up meaningfully as we are still mired in weak economic activity.”