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SUMMARY
Joe Brown, a former stock broker and financial educator, discusses the recent US Treasury auction where 30-year bonds were issued at over 5% yield for the first time since 2007. He explains the mechanics behind Treasury auctions, the implications for government borrowing costs, and the potential policy response involving bank deregulation.
MAIN POINTS
- The US Treasury conducted a $25 billion auction for 30-year bonds at over 5% yield, a level not seen since 2007.
- Treasury auctions involve both non-competitive and competitive bids, with the yield set by the highest rate needed to fill the auction.
- Existing Treasury bonds, known as off-the-run, are traded on the secondary market and their yields fluctuate with market prices.
- Bond prices and yields are inversely related, and recent secondary market trades saw yields above 5% even before this auction.
- Rising government borrowing costs are widespread across all maturities, and the government may pursue bank deregulation to address the issue.
- Permanent removal of the supplementary leverage ratio could allow banks to buy more Treasuries, lower yields, and stimulate economic growth.
DETAILED ANALYSIS
The US Treasury's recent auction of 30-year bonds at a yield exceeding 5% marks a significant milestone, as this is the first time such a rate has been reached since 2007. This development reflects the broader trend of rising interest rates since their historic lows in 2020, driven by persistent government borrowing and increasing deficits. Treasury auctions are structured to first absorb non-competitive bids, typically from retail investors who accept the average yield, before moving to competitive bids from financial institutions that demand higher rates.
In this auction, the Treasury exhausted non-competitive offers and had to accept progressively higher yields from competitive bidders, ultimately setting the yield for all participants at 5.046%.
The distinction between newly issued 'on-the-run' Treasuries and older 'off-the-run' bonds is crucial for understanding market dynamics. While the yield on existing bonds can temporarily exceed 5% due to secondary market trading, the government only locks in these higher borrowing costs when new auctions are conducted at such rates. The inverse relationship between bond prices and yields means that as investors sell off existing bonds, yields rise, making it more expensive for the government to borrow when new debt is issued.
This trend is not limited to 30-year bonds but is evident across the entire maturity spectrum, from short-term bills to long-term bonds.
With government spending and deficits continuing to grow, the cost of servicing debt is escalating. A potential policy response under consideration is the permanent removal of the supplementary leverage ratio, a regulation that limits how many Treasuries banks can hold. Temporarily lifted in 2020, this measure allowed banks to absorb more government debt, pushing yields lower.
Making this change permanent could enable banks to purchase more Treasuries, lower government borrowing costs, and potentially stimulate lending and economic growth. However, such a move carries risks, including the possibility of increased inflation if economic growth does not keep pace with expanded lending.
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