ROI-For Trump’s Treasury, the sting is in the auction ‘tail’: McGeever​

US Treasury auctions are supposed to be dull, ​predictable, and non-newsworthy affairs. But these are not normal times, and the Trump administration now risks seeing weak ​debt sales make headline news. The Treasury plans to sell nearly $120 billion of debt ‌this week, ​the first sales outside of T-bills in two weeks: $58 billion of three-year notes on Tuesday, $39 billion of 10-year notes on Wednesday, and $22 billion of 30-year bonds on Thursday.

These might normally be non-events, but they're under increasing scrutiny because the September 22-24 auctions were remarkably weak, particularly the five-year note auction on Sept. 23, which helped spark the biggest rise ‌in bond yields since April last year. Yields have not come down since and have instead powered ahead to multi-decade highs across most maturities. It's worth stating that there's next to zero chance that the US would ever have a "failed" debt auction. Primary dealers – the 26 Wall Street banks and institutions currently approved by the New York Fed as Treasury market makers – will always participate. They effectively underwrite the sales, ensuring the $30 trillion US debt market – the most liquid market in the world – functions ‌smoothly.

This, in turn, keeps the entire global financial system chugging along, as well. Trillions of dollars of global debt, assets, and market derivatives use Treasuries as a reference. US government bonds are also the collateral used to ‌lubricate the pipes of US and global financial plumbing - repo agreements, interbank lending, and funding. In short, as long as US debt is the lynchpin of the global financial system, there will always be buyers at Treasury auctions. The issue, as ever, is the price at which these sales clear. Right now, borrowing costs on the secondary market are the highest since the mid to early 2000s, so it is reasonable to assume that Treasury will pay comparably high rates on the primary market.

But as the most recent auctions have shown, there is also still room for negative surprises. TOO ⁠BIG TO TAIL?

The $70 ​billion sale of five-year notes on September 23 was one ⁠of the most alarming in recent memory. Demand as measured by the 'bid-to-cover' ratio was the lowest in nine years. Treasury ultimately sold the notes at 5.033%, which was more than three basis points above the market yield at the bidding deadline. Three basis points might not sound like ⁠a lot, but for a five-year auction, that’s extraordinary. It was the largest so-called "tail" since June 2022. To find the last time a five-year auction had a 3 bps "tail," JP Morgan analysts note, you have to go all the way back to 2011, when a ​brewing debt ceiling crisis would lead to a credit rating downgrade that August.

Moving back to the present, concerns about the dire US fiscal outlook have pushed up long-term borrowing costs. As a result, the Trump administration ⁠is widely expected to gradually shift the weight of the Treasury’s huge borrowing requirements towards the shorter - and cheaper - end of the curve. This is why the five-year auction two weeks ago caused such alarm. "Tails" of 3 bps are common in longer bond auctions, but not in sales of debt that ⁠sit ​right in the so-called "belly" of the yield curve. If Treasury is being forced to pay higher premiums to shift these notes, then Houston, we have a problem.

Fat auction “tails” can be a result of multiple forces, including market volatility on the day itself or more worrying fundamental issues that might erode demand over time. It's often difficult to untangle the two dynamics, as they are not mutually exclusive. On a more optimistic note, these jitters haven’t migrated to the front end ⁠of the curve. Yet.

Three-year and 10-year yields are up around 50 basis points from their last auctions a month ago, hovering around 4.96% and 5.32%, respectively. The 30-year yield is up around 35 bps at 5.65%. That ⁠should be high enough to attract solid demand and ensure smooth ⁠sales, right? Probably. But if there’s a sting in the tails, volatility and uncertainty could bite across the market. Investors will be watching like, well, hawks.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and X.

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