Market Extra
The 30-year Treasury bond still matters, as it can be a measure of trust in the U.S. government
Updated
The Treasury Department’s auction of 30-year bonds on Thursday was a crucial test for markets and for the U.S. government, as America’s long-term borrowing costs have climbed to their highest levels in 24 years.
In the simplest of terms, the auction passed that test.
On Wednesday, a strong auction of 10-year Treasury notes BX:TMUBMUSD10Y had briefly improved the jittery tone in markets around rising yields globally. But before Thursday’s auction, some jitters returned as the yield on the 30-year Treasury bond BX:TMUBMUSD30Y had climbed to fresh 24-year highs above 5.73%, as oil prices CL00 BRN00 surged amid worries that the Iran war was on the verge of re-escalating.
Yet results of the 30-year auction showed that yields had reached levels to attract relatively strong demand. The bid-to-cover ratio, or the dollar amount of bids received compared with the dollar amount of bids accepted, came in at 2.54 to 1. While that was down from 2.61 to 1 in the previous 30-year auction, it was above the 2.41-to-1 average of the past five auctions.
In afternoon trading Thursday, the 30-year yield had pulled back sharply from its highs to 5.61%.
The 10-year Treasury yield is seen as the benchmark rate, given that it helps determine interest rates on a number of consumer loans, such as home mortgages. But the 30-year Treasury yield still matters for investors, because it is “the one maturity the [Federal Reserve] does not control, and the one the world has to want,” said Vincent Ahn, portfolio manager at SLW Investments, on Thursday morning.
The 2-year Treasury yield BX:TMUBMUSD02Y can be considered a bet on what the Fed does next year on interest rates, but the 30-year yield can reflect “the price of trusting a government with your money for a generation,” Ahn told MarketWatch.
This trust is crucial, particularly given the uncertainty around inflation and as the U.S. deficit remains elevated — and since the U.S. needs help financing its $40 trillion national debt.
Six months ago, a sustained push above 5% for the benchmark 10-year Treasury yield and its 30-year counterpart was viewed as unlikely.
“Not long ago, 5% was viewed as a line in the sand,” Bret Kenwell, U.S. investment analyst at eToro, wrote in commentary Thursday. “Now, investors are questioning whether that threshold has moved closer to 6%.”
On Thursday, the 30-year yield rose to an intraday high of 5.732%, the highest level seen since June 2002, according to FactSet data, before paring its gains to 5.661%.
The gap in yields comes as this year’s deluge of corporate debt from the “hyperscalers” in the artificial-intelligence race is expected to grow further next year. Alphabet GOOGL GOOG, Meta Platforms META, Amazon.com AMZN and other megacap tech companies leading the AI build-out have been borrowing for 10 years, 30 years and even 100 years in global markets to finance their efforts.
”Washington needs capital. Hyperscalers need capital. Data centers need capital. Power generation needs capital,” Stephen Innis, managing partner at SPI Asset Management and a global market strategist, wrote in commentary Thursday. “If the desired level of investment rises faster than the available pool of savings, the system needs a higher return to make the pieces fit.”
Higher yields are already a stumbling block for parts of the stock market SPX beyond tech, especially among small-cap stocks RUT that until recently had been outperforming this year.
That’s why Thursday‘s 30-year Treasury auction was so important. Liquidity tends to be thinner than that of shorter-dated notes, and buyers tend to be pensions, insurers and some foreign accounts, Ahn at SLW noted. Dealers tend to avoid shorter-term bonds, in part because their values can be more vulnerable to swings when factors like inflation concerns flare up.
“So, a 30-year auction is the one place where the question is not what price, but who shows up,” Ahn said. A strong auction could calm markets more, while weak previous auctions of long-end bonds have been prone to sparking fresh rounds of selling in global sovereign-debt markets, he added.
U.K. 30-year yields BX:TMBMKGB-30Y hit 6% last week but have since eased slightly. The dramatic selloff in French bonds BX:TMBMKFR-10Y also remains a focal point in global markets.
See: French bonds are suffering through their worst decade since 1803 — and investors are bracing for more pain