The U.S. Treasury will put about $22 billion worth of bonds up for sale on Thursday. Not just any bonds, but 30-year bonds. That’s the longest-maturity bond the U.S. government sells. How that auction goes is going to tell us something about how expensive borrowing will be for the government moving forward, but also for the rest of us.
In other words? “This is a test,” said Mark Cabana, head of U.S. rates strategy with BofA Securities. The auction is a test of investor interest, “to see how well that ultimate demand is looking.”
Thirty years is an awfully long time to lend anybody money, even the U.S. government, because a lot can change in 30 years. And over the past eight months or so, investors have started to worry a little more about that.
“The auction this time around is a little bit more important, because there just have been increasing concerns about the sustainability of U.S. deficits and whether the demand we have seen historically will be there,” said John Canavan, lead analyst at Oxford Economics.
Deficits matter to long-term bond investors because they affect interest rates. And interest rates affect how much money investors are going to make.
“If it seems that the U.S. fiscal trajectory is deteriorating, that just means the U.S. is likely to issue more and more debt in the coming years,” said Gennadiy Goldberg, head of U.S rates strategy at TD Cowen. “Investors want to be paid higher and higher interest rates to hold that debt.”
The bigger the deficits in the future, the harder the government may have to work to borrow money to cover them, and the higher interest it may have to pay in the future. But if you are buying a 30-year bond — well, 30 years, that is the future. Long-term investors will want higher rates now to cover that future. They already have: they’ve started demanding almost a full percent higher interest rate. The question is how much more will they want and how soon.
“Markets are looking for any signs of weakness,” Goldberg said.
They’ll look at how much demand there is at this coming auction, and where that demand is coming from, and they’ll look at what interest rate the market settles on for these bonds. Recently, all of this looks stable, said BofA’s Cabana.
“Sentiment is not as sour as it has been in relation to recent months,” he said.
Which is good, because whatever interest rates the government ends up having to pay, that sets the rates we all pay — for auto loans, mortgages, business loans and more out in the rest of the economy.