Long-term Treasurys rallied on Monday after a promising $16 billion auction of 20-year Treasury bonds, an event investors have generally overlooked but have started to closely monitor in recent months amid surging Treasury yields.
The highest yield on Treasurys auctioned Monday was 4.78%, 3 basis points below the 20-year bond’s yield on the secondary market before the auction closed at 1 p.m. ET. That indicates buyers at Monday’s auction were prepared to pay a higher price than markets were expecting.
Less than two weeks ago, Treasury yields spiked and U.S. stocks fell during a similar $24 billion auction of 30-year Treasury bonds. The 10-year yield rose 11 bps to 4.63% when that sale occurred on Nov. 9, while the S&P 500 Index dropped 0.8%, ending eight straight trading sessions of gains. Since then, bond yields have declined and the S&P 500 has surged 4.6%.
U.S. Debt, Interest Costs Sharpen Focus on Auctions
The U.S. Treasury conducts bond auctions routinely as a means of financing new debt and refinancing its existing obligations. For years, such auctions have garnered relatively little financial market interest.
That has changed in 2023, though.
The Federal Reserve's recent interest rate hikes to curb inflation have sent the benchmark 10-year yield to its highest level since 2007.
Meanwhile, Congress has struggled to address fiscal matters amid showdowns over the U.S. debt ceiling and the 2024 fiscal budget as the U.S. budget deficit has doubled to $2 trillion.
The rising deficit requires the issuance of additional Treasury debt to fund it. At the same time, interest costs on existing debt have increased considerably, courtesy of the Fed's rate hikes.
The Treasury's net interest costs reached $659 billion in the fiscal year ended Sept. 30, up 39% from the prior fiscal year. Its interest costs have almost doubled in the past three years and now represent the federal government's fourth-largest financial outlay behind Social Security, Medicare, and national defense.