Market Yields on the Rise Again

After showing signs of flattening out last week, U.S. Treasury market yields climbed again on Monday. All maturities except the 1-month bill now yield in excess of four percent. All market yields are above the latest auction yield under respective maturity:

Table 1

Source: U.S. Treasury

Rising yields help attract financial capital to the U.S. economy. Figure 1 reports exchange rates vs. three key European currencies, reported as foreign currency units per $1:

Figure 1

Source: Federal Reserve

A stronger U.S. currency contributes to dampening inflation, as fewer dollars are needed to buy the same imported products. The effect is modest, but nevertheless worth noting. 

To some degree, the strengthening of the dollar is a pull factor for foreign financial investments: so long as the upward trend comes with expectations that it will continue, overseas investors can expect gains both from U.S. equity in their portfolios and from a stronger dollar. Upon selling the equity, they cash in from a higher market price as well as from a stronger dollar.

When expectations of a rising dollar fade away, though, foreign investors can exercise herd behavior, sell their assets quickly and likewise trade their dollars for their currencies of choice. 

A sell-off causing a run on the dollar is unlikely in the near future, but not unthinkable over an extended time horizon. The timing for such an event, if it happens, depends on when investors lose confidence in the ability of the U.S. Treasury to honor its debt payments. 

There are a couple of tripwire variables to look out for in this context, one of them being the average cost of the U.S. debt. As of October 31, this average cost (per our model estimate) is 1.99 percent. This is up from 1.87 percent on October 1. 

As the Treasury auctions new debt in order to replace maturing securities, and to add funding for the federal government's current budget deficit, the marginal yield on every maturity will continue to rise (except the 4-month, which is new). The expected increase in yields on the debt as a whole is significant, given that an estimated 60 percent of the debt is under the 3-10-year maturities. The average interest cost on these maturities is currently $306 billion per year, equal to a 1.64-percent interest.

If the average interest on this share of the debt rises to 1.99 percent, it adds $64.7 billion to the cost of the national debt. This is under the assumption that no new debt is added under these maturities. 

This is, again, for a specific set of U.S. Treasury notes, where the average interest currently is well below the average for the total U.S. debt.

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

Sharp Marginal Yield Rise in Monday Auctions

On Monday, the U.S. Treasury sold $65.8 billion worth of 3-month (13-week) bills. Tendering $157 billion, the auction produced a tender-auction ratio of 2.39 and a yield of 4.05 percent. 

This auction replaced $62.4 billion worth of maturing 3-month bills, on which the yield was 2.42 percent.  The yield on the bills sold at Monday's auction was the first above 4 percent for this maturity class, though up only modestly from last week's 3.95 percent. 

However, the total yield cost for the debt sold at Monday's auction is 75 percent higher than for the expiring debt under the same maturity.

The 2.39 T/A ratio was close to the 2.41 for the expiring debt. It was also in line with last week's 2.40 and the 2.34 ratio from two weeks ago. 

The other Monday auction sold $52 billion worth of 6-month (26-week) bills. This auction tendered $139.5 billion for a T/A of 2.68. this is notably higher than for the past two weeks' 2.41 and 2.49. The auction produced a median yield of 4.405 percent, up from 4.33 percent last week and 4.19 percent two weeks ago. 

Technically, this auction replaced $49.5 billion worth of expiring 6-month bills, which paid 1.38 percent. The cost of the yield on the debt sold today is 235 percent higher than for the expired debt under the same maturity. 

Both auctions sold more debt than expired under each maturity. The increase in cost of new vs. expired debt is a direct consequence of the rapid rise in interest rates in recent months. Even if auction yields stop rising, these marginal-cost increases of the debt will continue to pull the average cost of U.S. debt upward for an extended period of time. 

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

U.S. Fiscal Forecast Weekly Update

Three events of this week deserve the highlight. 

First of all, the European Central Bank raised its three key interest rates again. This was the third increase in a row, and the second one at the 0.75 percent level. The ECB continues its monetary tightening, but it does so on the heels of rising market rates - not ahead of the curve as the Federal Reserve did. Nevertheless, this reinforces the trend upward on interest rates that started this spring; we can also expect the euro to strengthen vs. the dollar.

The second event worth of note is the announcement by the Fed that its M2 money supply continues to shrink. While money supply is still rising at an annual rate, the actual M2 outstanding has been declining for several months now. Tightened liquidity will be bad for for equity markets, but it is good for the sovereign-debt market.

Third, we saw a trend break in auction yields on the U.S. debt. After months of rising yields, every auction this week strongly hinted that yields are plateauing. Market yields pointed even more strongly in the same direction. This is possibly a break in the upward trend, but at the very least a welcome pause.

Last but not least, our model over the cost of the U.S. debt says that the average annualized cost currently is an estimated 1.98 percent of total debt. This is up from 1.87 percent on October 1, i.e., the beginning of the current fiscal year. We estimate that at this higher rate, the cost of the debt will be $300 billion higher for the entire fiscal year than at the 1.87-percent level. This estimate is contingent on the debt itself not increasing, and on interest rates not increasing further.

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

Treasury Market Yields Decline

Market yields on U.S. government debt fell on Thursday for the third day in a row, adding credibility to our prediction that interest rates in the U.S. economy are close to their peak. 

The only exceptions were at the short end of maturities: the 1- month, 2-month and 3-month all paid more at the closing of Thursday's market than they did yesterday. All others fell:

Table 1

Source: U.S. Treasury

While U.S. rates are likely approaching their peak for now, rates in Europe will increase as a result of today's decision by the European Central Bank to raise its lead interest rates by 0.75 percentage points. Those rates now span from 1.5 percent to 2.25 percent. 

The ECB motivates its rate hike—the third in a row—with persistent and rising inflation. While U.S. consumer-price inflation has declined over the past two months, euro-zone consumer prices continue to rise at an accelerating pace. The September inflation rate of 9.9 percent was well above the 9.1 percent recorded in August.

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

More Signs of Treasury Rates Plateauing

Thursday's auctions of the 4- and 8-week bills reinforced the impression that the rise in interest rates, at least on U.S. government debt, is tapering off. While still increasing, the auction yields are not on the same runaway track as they were earlier in October.

The 4-week bill attracted $163.6 billion in tender, up from $155 billion last week, $152.7 billion two weeks ago and $139.6 billion three weeks ago. While tenders have increased, it is also worth noting that the accepted volumes have gone up as well: $52.2bn three weeks ago, $62.7bn two weeks ago and $67bn last week.

The rise in tender has kept apace with the rise in accepted investments, thus keeping the T/A ratio relatively stable over the last couple of weeks: today's auction landed at 2.43.

The median yield on the 4-week auction was 3.55 percent, which is up from 3.355 last week and 3.19 percent the week before. This more modest yield increase was paired with a stable T/A, adding a bit more evidence that the pressure on the U.S. Treasury to continue to raise yields is easing. 

A similar impression is given by the 8-week auction, where the median yield landed at 3.78 percent. This is only modestly up from last week's 3.64 percent. This yield increase also came with a rise in the T/A ratio, from 2.42 two weeks ago and 2.52 last week, it stopped at 2.62 this week.

Tender offers amounted to $148.9 billion, of which $56.8 billion was accepted. The tender was $10.3 billion higher than last week, while the accepted volume was close to last week's $55 billion.

In addition to the short-maturity bonds, on Thursday the Treasury also held its monthly auction on 7-year notes. This auction tendered $85.1 billion, of which $35 billion was accepted (T/A = 2.43). The median yield at the auction was 3.95 percent. This is a small increase from last month's 3.85 percent. While the T/A was a drop from last month's 2.57, it is well in line with the T/A ratios from the auctions in May-August.

It is important to remember that even if the interest rates at new Treasury auctions do not rise as fast as they have recently, and even if they stop rising, that does not mean the cost of the government debt will stop rising. On the contrary, after today's auctions the estimated average interest rate on the U.S. debt is at 1.98 percent. This rate has now increased by 0.01 percentage points per day for a whole week, and is 0.11 percentage points higher than at the start of October.

Even if the current rise in the average interest cost came to a stop, the difference between the current rate and the 1.87 percent from the start of the month, is equal to $300 billion in higher interest-rate costs for the federal government over the entire fiscal year.

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

Interest Rates May Be Peaking

On Wendesday, the par yields for U.S. Treasury securities produced lower par yields for the second day in a row:

Table 1

Source: U.S. Treasury

Together with the strong performance of the 5-year note in today's auction, this two-day streak of declining market yields, albeit modest, could indicate that U.S. debt yields are near their peak. 

The sharp rise in interest rates on U.S. debt have not come unaccompanied. European interest rates have also risen since the beginning of the year. This, however, is not driven by domestic central-bank action. Figures 1-3 report par yields on a selection of euro-denominated sovereign-debt securities; the reported maturities are equal to those of the U.S. Treasury.

The securities are weighted averages for the euro zone. All data in Figures 1-3 is courtesy of the European Central Bank via Eurostat.

Figure 1 reports bill yields:

Figure 2 reports notes:

Figure 3 reports bonds:

Figure 4 compares the yield on the 10-year security from the U.S. Treasury with the numbers reported for the similarly maturing, euro-denominated weighted average: 

The ECB has been weaker than the Federal Reserve in executing a monetary tightening. However, it is expected to raise its lead interest rate by another 0.75 percent at tomorrow's policy meeting. 

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

Auction of 5-Year Note Breaks Pattern

The 17-week, 4-month bill was auctioned on Wednesday with $97.6 billion, down from $97.8 billion last week. With $34.1 billion accepted, this week's T/A fell to 2.86 from last week's 2.88. 

The other auction on Wednesday broke the pattern from the last several auctions across the maturity spectrum. Instead of a steady or declining T/A ratio and rising yield, the 5-year note went in the opposite direction. By attracting tender offers of $106.6 billion, up from $99.9 billion last month, for $43 billion accepted (down from $44bn), the T/A ratio rose to 2.48 from 2.27 last month. This is the highest for this Treasury note since July 2020.

At the same time, the median auction yield fell from 4.13 percent in September for 4.119 percent. 

It is too early to judge whether the upward trend in auction yields is coming to an end, but even if those yields will stabilize, the average interest cost for the U.S. debt will continue to rise, as new auctions on notes and bonds replace years-old debt. Adjusted for today's auctions, the estimated interest cost for the U.S. debt stands at 1.97 percent. This is up from 1.87 percent at the beginning of this month, and the beginning of the 2023 fiscal year. 

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

Money Supply Keeps Shrinking

In its monthly release of money-supply data, the Federal Reserve announced that the M2 U.S. money supply for the month of September was $21,459.4 billion. This is a 2.52 percent increase from the same month last year, which is the smallest year-to-year increase since July 2010. 

Figure 1 reports the year-to-year change in M2 money supply for the U.S. dollar since 1959:

Figure 1

Source of raw data: Federal Reserve

U.S. money supply peaked in March this year, with an all-time-high of $21,856 billion. The M2 supply in September is 1.8 percent lower.

Consistent with monetary tightening, interest rates on U.S. debt have risen substantially since March. Back then, the 2-year median auction yield was 2.534 percent . In today's auction, the same note came out with a median yield of 4.388 percent. This is the second month in a row above 4 percent, with September at 4.22 and August at 3.25. Auction yield in July was 2.95 percent. 

One year ago, the yield at the 2-year auction was 0.575 percent. 

Investors tendered $108.7 billion at today's auction, of which $42 billion was accepted. This caused the T/A to rise to 2.59 from 2.51 in September and 2.32 in August. 

The 2-year note's auction yield has now almost caught up with its market yield, which on Tuesday ended at 4.42 percent. As Table 1 shows, the market yield for all maturities fell modestly in today's trade:

Table 1

Source: U.S. Treasury

The total of outstanding 2-year notes represent $1,472 billion in U.S. debt, equal to 4.7 percent of the total debt. The rise in yields at today's auction marginally nudges the estimated average cost of U.S. debt up from 1.95 percent to 1.96 percent. 

Since the start of the 2023 fiscal year on October 1, total U.S. debt has increased by one percent. The estimated interest cost on that debt has increased five times faster, i.e., by 5 percent. 

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

A New Estimate for U.S. Debt Cost

The yields on U.S. Treasury securities continued their march upward in today's market trading. Below are today's yield's, the yields on Friday, and the latest auction yields:

Source: U.S. Treasury

The market yield for every maturity exceeds their latest auction yield. The biggest disparity is in the 1-year bill, where the current market yield is 118:100 relative the October 4 auction. This is expectable, given the steady upward trend in yields and the time since the last auction. 

The 7-year note also exhibits a major yield disparity, with markets paying 112:100 relative the September 28 auction yield. 

The next auction for the 1-year takes place on Monday November 1, while the 7-year auction is held on Thursday this week. We expect both to break the 4-percent margin with 0.25 percentage points for the 1-year and at least 0.1 percentage points for the 7-year. 

Today's auctions in the 13- and 26-week bills kept unchanged the weighted average tender-accept ratio for the U.S. debt. It has remained just a tick above 2.43 since Thursday last week, when it fell from 2.44 on Wednesday and 2.52 the preceding Tuesday. 

The T/A ratio is an important indicator of the liquidity at Treasury auctions. The lower the ratio, the closer the U.S. government gets to a point where interest rates will rise entirely on the security buyer's terms. This, in turn, is an estimate of the point often referred to as a fiscal crisis. 

Another indicator for predicting a fiscal crisis is the cost of the U.S. debt over a fiscal year, Currently, our model estimates the weighted, annualized, interest rate of the $31,228.6 billion debt to be 1.95 percent—up from 1.87 percent at the start of October—which equals $608.6 billion.  

According to our model, if interest rates continue to rise at auctions with the same trend as they have since October 1, the start of this fiscal year, the total cost for interest payments on the debt would be $799.2 billion. This figure is based on a constant-debt basis, i.e., that the $31.2 trillion U.S. debt as of October 21 would remain unchanged until September 30, 2023. 

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

Another Treasury Bill Nears 4 Percent in Auction

In Monday's auction, the 13-week, or three-month Treasury bill attracted $152.4 billion in tender, 2.4 times the accepted $63.4 billion. This ratio is up from last week's 2.34, marking the second week in a row with rising T/A for this bill. Despite increased competition for the bill, the yield rose again, ending at 3.95 percent. 

More yield increases are to be expected, given that the 13-week has been closing above 4 percent in the market since Tuesday last week. Friday's trade ended at 4.09 percent (same as Thursday). 

Monday auctions also sold $50 billion worth of 6-month (26-week) bills. With a total tender of $120.3 billion, this bill sold at a T/A of 2.41. This is the lowest tender-to-accept ratio for this bill in at least six months. The median auction yield rose to 4.33, marking the third week in a row above 4 percent: last week this bill sold at 4.19, and two weeks ago at 4.03. 

The 6-month bill yielded 4.43 percent in Friday's market, down from 4.48 percent on Thursday.

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We do not give investment advice. 

This blog provides analytical information solely the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

U.S. Fiscal Forecast: Weekly Update

This week saw the auction-yield cost of U.S. debt continue its crawl upward. The trend shows no signs of tapering off. Figure 1 reports the median yields at the latest auctions for the 4-, 8-, and 13-week bills; the time series for each represents the full amount of debt under respective maturity class: $234.5 billion under the 4-week, $391 billion under the 8-week, and $787.4 billion under the 13-week bill:

Figure 1

Source of raw data: TreasuryDirect.gov

The yields displayed in Figure 1 are the median yields at respective auctions. Those yields represent the marginal cost of debt under that maturity; when compared to the average yield for each security, we get a good idea of how quickly the cost of debt is rising, both within that security and—when aggregated—for the U.S. debt as a whole. 

The average yield per maturity in Figure 1 is well below the marginal yield, but it is nevertheless at or above three percent: 3.02 percent for the 4-week, 3.07 percent for the 8-week, and 2.96 percent for the 13-week. 

With the yield at the latest auction higher than the average yield, we can safely predict that the U.S. government is going to face rising debt costs for weeks and months to come. Every new auction replaced old, maturing debt with new debt, which is sold at a higher cost. 

Another way to look at the rising cost of the debt is to look at the payout—in other words the actual dollars of interest payments—that the U.S. Treasury has to make on an annualized basis. In other words, these are estimates of what the interest cost would be, should current auction yields and accepted ratios determine the cost over the coming fiscal year. 

For these three bills, the payouts have increased as follows, over the periods of time displayed in Figure 1:

• 65.6 percent for the 4-week bill;
• 56.1 percent for the 8-week bill; and
• 35.8 percent for the 13-week bill.

Again, these numbers do not reflect the actual fiscal cost, but tell us two things:

a) how much more expensive it is to renew debt under each maturity; and

b) what the long term trend is in said cost. 

Let us take a broader look at this trend, with some different but comparable numbers. 

The 7-year note auction, expected on October 28, will theoretically have to replace $29 billion worth of expiring debt from the equation exactly seven years ago. That auction resulted in a median yield of 1.845 percent, which means that the annual cost for honoring that $29-billion pile of debt has been just a hair over $535 million.

Suppose the Treasury were to simply replace those $29 billion of expiring 7-year notes with new ones, worth exactly the same. If it had to pay the latest market yield of 4.26 percent, the annual cost on this particular slice of U.S. debt would increase by almost 131 percent to $1.24 billion.

A similar estimate for the next 10-year auction suggests an annual interest cost of $924 million, a 236-percent increase from $391 million. 

Again, each auction only replaces a small portion of the debt, which means that if these predictions turn out to be accurate, in the short run they have only a marginal effect on the actual, current debt cost. However, they are powerful as means of predicting the debt cost over a longer period of time. Currently, an estimated 15 percent of the U.S. debt matures in one year or less, while an estimated 34 percent mature in 7-10 years (split equally between the two notes). 

Suppose, hypothetically, that the Treasury replaces the 15-percent that matures in no more than one year, and that on average they have to pay $1.50 in yield for every $1.00 in the debt they replace. All other things equal this increases the cost of the U.S. debt by 7.5 percent. 

Based on our current estimates of what the U.S. debt costs taxpayers, this increase alone will cost taxpayers another $45 billion per year. If the debt cost on this short-maturity segment of the debt were to double over one year, the cost increase would be $90 billion. And this is on just the 15 percent of the debt that matures in one year or less.

Looking at the debt as a whole, the cost trend is no less worrying. The Treasury auctions that have taken place thus far in October, have raised the weighted-average interest cost on the federal debt from 1.87 percent to 1.94 percent. Calculated on a $31.2 trillion debt, this means a debt-cost difference of $25.7 billion in one month alone.

Again, these numbers are annualized indicators for the whole fiscal year, allowing us to predict what is going to happen to the debt cost over the next year. At some point, this cost trend will become worrisome enough to investors, that the rise in yields becomes a self-propelling trend. When that happens, we have a fiscal crisis on our hands. 

Let us make clear that we are not on the threshold of a fiscal crisis. Not yet. The trends, however, in both Treasury yields and tender-accept ratios at auctions, are such that unless Congress takes appropriate fiscal measures to the contrary, we believe a crisis is possible in the next two years. 

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We do not give investment advice. 

This blog provides analytical information solely the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

European Red Ink, Falling U.S. Treasury Rates

This morning's numbers from Eurostat on government finances showed persistent budget deficits in key euro-zone countries like Germany and France. The currency union as a whole has run a consolidated deficit for ten quarters in a row. German public finances have been in the red since Q2 2020, with France starting in Q1 2020 (interrupted briefly in Q1 2021). 

The consolidated Italian government budget has been in the red for as long as the euro zone. Spain, another of Europe's large economies, has only had one surplus quarter since Q4 2019. 

Persistently weak government finances in Europe reminisce investors of the bad situation during the Great Recession of 2009-2012. Since the European economy as a whole exhibits clear signs of a recession—precipitous drops in capital formation and rising unemployment among the strong signs—investors correctly see refuge in U.S. Treasury securities. 

Today (10/21), the euro fell to €1.029 vas. the dollar (xe.com), before rebounding. This is the second-weakest position for the euro this month. Meanwhile, most U.S. Treasury yields fell slightly from yesterday [last median auction yield included]:

• 1-month: 3.55 (3.58) [3.355]
• 2-month: 3.78 (3.83) [3.64]
• 3-month: 4.09 (4.09) [3.75]
• 4-month: 4.31 (4.33) [4.10]
• 6-month: 4.43 (4.48) [4.19]
• 1-year: 4.58 (4.66) [3.895]
• 2-year: 4.49 (4.62) [4.22]
• 3-year: 4.52 (4.66) [4.24]
• 5-year: 4.34 (4.45) [4.13]
• 7-year: 4.28 (4.36) [3.85]
• 10-year: 4.21 (4.24) [3.85]
• 20-year: 4.54 (4.47) [4.319]
• 30-year: 4.33 (4.24) [3.85]

Every maturity yields solidly above its latest auction-yield rates, with the 1-year paying 17% more in the secondary market than at the last Treasury auction. 

The rise in 20- and 30-year bond yields followed a long streak of rising yields, with the 30-year crossing the 4-percent line as recently as October 17.

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We do not give investment advice. 

This blog provides analytical information solely the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

TIPS Auction and Market Yields

Today's Treasury auctions included the weekly 4- and  8-week bills, as well as the less-common 5-year inflation-protected TIPS. This auction tendered $50 billion, of which the Treasury accepted $21 billion. The 2.38 Tender-to-Accept ratio is slightly above the latest T/A for the nominal 5-year Treasury note, which on September 27 tendered $99.9 billion to $44 billion accepted, at a T/A of 2.27.

The median yield on today's TIPS auction was 1.669 percent. This is up from the 1.22 percent yield average for TIPS sold in the secondary market in September, but less than the October 18 market yield of 1.79 percent. 

Assuming that Treasury investors have not changed their inflation forecast of 2.91 percent from September, the latest auction yield for the 5-year TIPS points to a median yield at the auction for October 5-year nominal notes of 4.58 percent. The September auction for nominal 5-year notes yielded 4.13 percent.

The auction for 5-year nominal Treasury notes will be held on October 26.

Today (Oct. 20) the Treasury market drove yields on all maturities upward. As we predicted earlier today, the yield on the 4-week bill rose above 3.4 percent to stop at 3.58 percent. The others increased as follows, compared to yesterday; [latest median Treasury auction yield included]:

• 8-week, from 3.72 to 3.83 [3.63];
• 13-week, from 4.07 to 4.09 [3.75];
• 17-week, from 4.32 to 4.33 [4.10];
• 26-week, from 4.45 to 4.48 [4.19];
• 52-week, from 4.60 to 4.66 [3.895];
• 2-year, from 4.55 to 4.62 [4.22];
• 3-year, from 4.56 to 4.66 [4.24];
• 5-year, from 4.35 to 4.45 [4.13];
• 7-year, from 4.26 to 4.36 [3.85];
• 10-year, from 4.14 to 4.24 [3.85];
• 20-year, from 4.38 to 4.47 [4.319]; and
• 30-year, from 4.15 to 4.24 percent [3.85]. 

We expect the 13-week bill to pass four percent in its auction on Monday. 

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We do not give investment advice. 

This blog provides analytical information solely the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.

Treasury Bill Yields Keep Rising

In this week's Treasury auctions for 4- and 8-week bills, the median yields went even higher than last week. 

Today's auction of the 4-week bill tendered $155 billion, with $67 billion accepted. The T/A is now at 2.31, which is down from 2.47 three weeks ago. Over the same period of time, the median yield at the auctions has increased from 2.58 percent to 3.355 percent. 

The opposite trends of the T/A ratio and the yield are signs of declining market interest, though it is worth noting that the day before this auction, the Treasury sold the first-ever batch of its new 17-week, or 4-month bill. That auction yielded 4.1 percent, which may have satisfied many investors in the short-term end of the maturity spectrum.

Thursday's auction of 8-week bills tendered $138.6 billion, with $55 billion accepted. The T/A of 2.52 is up from the past three auctions, equal to where it was four weeks ago, but down from the three auctions prior to that. 

Median yield for the 8-week came out to 3.64 percent, marking the fourth 8-week auction in a row with a yield above three percent. Last week yielded 3.4 percent, and the two auctions before that 3.15 percent and three percent flat, respectively. Seven weeks ago, the 8-week auction produced a median yield of 2.7 percent.

Since the 4- and 8-week bills account for only $625.5 billion of the U.S. debt, the rise in yields do not have any major effects on the cost of the debt. However, the increases put further pressure on yields for longer maturities, especially since the 4-week auction yield is now higher than its current market yield. 

We expect the 4-week par yield from today's secondary market to exceed 3.4 percent, which would be a jump up from yesterday's 3.31 percent. 

New 4-Month Treasury Bill

On October 19, the Treasury auctioned off its first package of 4-month, or 17-week Treasury bills. 

Investors tendered $97.8 billion, of which $34 billion was accepted, for a T/A of 2.88. This is currently the highest T/A for any bill; the 4-week most recently earned a T/A of 2.44, with the 8-week at 2.42. The October 17 auction of the 26-week bill produced a T/A of 2.49, while the 1-year landed at 2.51 on October 4.

The new 17-week bill sold at a median yield of 4.1 percent. This slots in between the latest median of 3.75 percent for the 13-week and 4.19 percent for the 26-week. 

On the October 19 secondary market, the par yield for the 17-week (4-month) bill came out at 4.32 percent. All the other maturity classes saw rising yields:

1-month: 3.31, up from yesterday's 3.25; the latest auction yield for the 1-month was 3.19 percent;

2-month: 3.72 (3.70) [3.40];

3-month: 4.07 (4.04) [3.75];

6-month: 4.45 (4.39) [4.19];

1-year: 4.60 (4.50) [3.895];

2-year: 4.55 (4.43) [4.22];

3-year: 4.56 (4.43) [4.24];

5-year: 4.35 (4.21) [4.13];

7-year: 4.26 (4.12) [3.85];

10-year: 4.14 (4.01) [3.85];

20-year: 4.38 (4.27) [4.319]; and

30-year 4.15 (4.04) [3.85].

All other things equal, the differences between auction and market yields on the 7-, 10- and 30-year securities indicate that the Treasury will have to pay well over four percent in November in order to keep the T/A ratios from falling. 

At the September 28 auction, the 7-year note tendered $92.5 billion, with $36 billion accepted (T/A = 2.57). Median yield was 3.85 percent, up from 3.09 percent in August.

On October 12, the 10-year note tendered $74.9 billion, with $32 billion accepted (T/A = 2.34). Median yield of 3.85 percent was up from 3.24 percent in September.

The 30-year bond auction on October 13 tendered $43 billion and accepted $18 billion (T/A = 2.39), with median yield of 3.85 percent being higher than the 3.45 percent from August. 

Predicted Debt Cost Exceeds $800bn

In our latest estimate, the U.S. Fiscal Forecast predicts that the interest cost on the U.S. government debt for fiscal year 2023 will be approximately $836 billion. 

As of October 17, the U.S. government owed $31,211.4 billion. The estimated, weighted interest on this debt is 1.93 percent. This means that currently, the annual value of the interest on the U.S. debt equals $601.2 billion. 

If the rise in auction-based median interest rates would continue on their current trajectory, the total interest cost for the U.S. debt would rise to $836 billion.

This forecast includes today's auction on 20-year U.S. Treasury bonds, which attracted $30 billion in tender. Of this, $12 billion was accepted, for a T/A of 2.5. 

The median yield at the auction was 4.319 percent, a substantial rise from last month's 3.75 percent and 3/28 percent in August. 

At 4.319 percent, the auctioned 20-year bond is slightly ahead of its latest secondary-market yield from yesterday, which landed at 4.27 percent. The 20-year is now the highest-yielding per auction, but not per secondary market: as of yesterday, the 1-year bill paid 4.5 percent, with the 2- and 3-year notes paying 4.43 percent. 

The T/A ratio at the 20-year auction is comparable to the ratios from the past six months, with the exception of August, when the ratio landed at 2.15. The estimated, weighted average T/A for the entire U.S. debt is currently 2.43. We do not yet make trend predictions for the T/A ratio.

A review of T.A trends for the different Treasury maturity classes suggests that investors are moving from short- to long-term maturities. This trend is not strong, but suggests a stabilization, perhaps even downward pressure on long-term interest rates in coming weeks. By contrast, unless the Treasury retires short-term debt, those yields could rise more quickly than they are today. This would put the Treasury at risk for an inverted yield curve.

Inflation Expectations in TIPS Have Peaked

The U.S. Treasury sells inflation-protected notes and bonds, known by their acronym TIPS. The difference between their yield and the yield on nominal Treasury securities, we can estimate the inflation expectations harbored by TIPS investors. 

The Federal Reserve reports market yields for TIPS with maturities of 5, 7, 10, 20, and 30 years. The average yields for these securities in September were as follows:

1.22 percent on the 5-year;

1.16 percent on the 7-year;

1.12 percent on the 10-year;

1.19 percent on the 20-year; and

1.28 percent on the 30-year.

Using median Treasury auction yields for nominal securities (to avoid influence from short-term yield volatility), we get the following:

4.13 percent for the 5-year;

3.85 percent for the 7-year;

3.24 percent for the 10-year;

3.75 percent for the 20-year; and

3.45 percent for the 30-year.

Simple subtraction gives the inflation expectations among TIPS investors in September:

2.91 percent for the 5-year;

2.69 percent for the 7-year;

2.12 percent for the 10-year;

2.56 percent for the 20-year; and

2.17 percent for the 30-year.

With the caveat that we are comparing TIPS market yields with median auction yields for nominal securities, these inflation numbers are nevertheless telling. They suggest that investors in U.S. sovereign debt expect inflation to remain well above the Federal Reserve's target rate of two percent for several years to come. 

Figure 1 shows how the same inflation expectations have evolved over the past five years. 

Figure 1

Sources of raw data: Federal Reserve (TIPS); U.S. Treasury (Nominal)

There is a silver lining in the rise of inflation expectations since 2020: they have plateaued over the past 12 months, and thus have not incorporated the significantly higher inflation rates in producer and consumer prices. This means that the current inflation rates are widely expected to be relatively short-lived. If the price-setting decision makers of key businesses share the same expectations, there is less risk that current inflation is perpetuated simply by expectations, as is otherwise a problem in countries that suffer from high inflation.

30-Year Treasury Tops Four Percent

 In secondary-market trading on Monday, the yield on most U.S. Treasury securities moved about, though with a slight edge upward. Yields for three securities dropped:

• 2-Year note dropped from 4.48 to 4.45;
• 3-Year note dropped from 4.47 to 4.45; and
• 5-Year note dropped from 4.25 to 4.24.

Three securities stood unchanged from Friday:

• 1-Month bill at 3.3 percent;
• 1-Year bill at 4.5 percent; and
• 7-Year at 4.15 percent.

The remaining maturities delivered higher yield on Monday:

• 2-Month bill rose from 3.61 to 3.66 percent;
• 3-Month bill rose from 3.81 to 3.97; 
• 6-Month bill rose from 4.31 to 4.38;
• 20-Year bond rose from 4/26 to 4/29; and
• 30-Year bond rose from 3.99 to 4.04.

With the 30-Year bond now above four percent, only the 1- and 2-month bills pay less than that.

A comparison between secondary-market yields and median yields from the latest Treasury auctions indicates that the Treasury will have to pay more in coming weeks in order to retain its investors. The biggest market-to-auction difference is in the 1-year note, which pays 4.5 percent in the market but only yielded 3.895 percent at its October 4 auction. This is a 15-percent advantage for the secondary market. 

The lowest market-to-auction difference is in the 1-month bill, where the market pays $1.034 in yield for every $1 in yield paid out on auction-sold bills.

Treasury Yields Continue to Rise

Median yields on U.S. Treasury bills increased at today's auctions, compared to last week. The 13-week bill paid a median of 3.75 percent, compared to 3.42 percent last week. The 26-week bill paid a median of 4.19 percent, up from 4.03 percent last week.

The yield for the 26-week bill is the second in a row above four percent. The 13-week bill passed three percent five weeks ago.

In total, the 13-week bill tendered $148.3 billion, with  $63.5 billion accepted, with the T/A ratio at 2.34. This is up from 2.25 last week. 

The 26-week tendered 124.6 billion, with $50.1 billion accepted. The T/A of 2.49 is lower than last week's 2.69.

Significant U.S. Oil Production Deficit

According to raw data from the Energy Information Agency, from August 2021 through July this year, the U.S. government sold off 25 percent of the Strategic Petroleum Reserve. Data beyond July is not yet available. 

The SPR sell-off increased domestic crude-oil supply more than during any other 12-month period on record. For example, in the months of May, June and July, the SPR drawdown worked as an oil supply increase of, respectively, 4.7 percent, 6.0 percent and 5.4 percent.

Figure 1 reports the change in the Strategic Petroleum Reserve as percent of total U.S. field production. An increase in SPR is reported as a deduction from U.S. field production (green) while a sell-off of SPR is reported as an increase (red):

Figure 1

Source of raw data: Energy Information Agency

In the first six months of 2022, the United States net-imported crude oil equal to 3.9 percent of domestic field production. During the same period of time, the sell-off of SPR crude oil equaled 4.8 percent of domestic field production. In other words, there was a domestic production deficit equal to 8.7 percent of total crude-oil consumption.  

U.S. Money Supply: An Overview

 The recent changes in the Federal Reserve's monetary policy, away from accommodating budget deficits, is contributing to a cool-off of inflation. However, it is too early to expect a return to the more conservative monetary policy regime of the Alan Greenspan era when U.S. inflation often stayed within the 2-3 percent band. 

A main reason to expect a long path back to monetary conservatism is the size of the current money supply in the U.S. economy. Figure 1 reports the ratio of M2 money supply to current-price GDP, on a quarterly basis. The four marked episodes are commented below.

Figure 1

Source of raw data: Federal Reserve (M2); Bureau of Economic Analysis (GDP)

Episode 1 is the Greenspan-era monetary accommodation after the terrorist attacks on September 11, 2001. Episode 2 is the first Bernanke-era QE, which was launched in response to the financial-crisis elements of the Great Recession of 2009-2011. Episode 3 is the second major QE episode under Bernanke. It ended when Yellen succeeded Bernanke as Fed chair—see the flattening of the ratio right after Episode 3.

Episode 4 is the Powell-era monetary expansion in response to the 2020 pandemic. As a result of this expansion, there is now approximately $3.50 in M2 supply for every $1 of GDP. This should be compared to $2.75 in 2016 and $2.20-2.40 in the 1960s, 1970s and 1980s. The monetary restraint during the 1990s brought money supply down to less than $1.90 per $1 GDP.

Excess money supply means over-supply of liquidity in the financial system. This in turn leads to cheap financing of equity-market investments and speculative bubbles. It also leads to excessive, cheaply funded deficits in the government budget. 

Private Employment Still Strong

The U.S. labor market is still strong, exhibiting no apparent signs of a recession.

According to the Bureau of Labor Statistics, private-sector employment in September stood at 130.7 million, up 5,264,000 or 4.2 percent since September last year. Percentage-wise, this is the second-highest increase in private sector employment in at least 15 years. The only higher figure for September was in 2021.

September employment is 1,869,000 or almost 1.5% above where it was in 2019, the last year before the pandemic-related economic shutdown.

In total, private-sector employees earned $146.1 billion per week in September, $13.5 billion or 9.3 percent higher than in  September 2021. This is also the second-highest increase in at least 15 years, surpassed only by the 9.6-percent increase in September last year. 

For comparison, the strongest total weekly earnings number for the month of September during the recovery from the Great Recession, was in 2012 when they increased by 6.3 percent. 

With work hours remaining unchanged at 34.5 per week for the third consecutive year (month of September), the increase in per-employee weekly earnings is entirely due to rising hourly wages. In September this year, that number stood at $32.40, up by 4.9 percent from last year's $30.88.

The increase in the hourly rate is the highest in at least 15 years, again for September. With last year's figure at 4.8 percent, it is unlikely that this year's increase is motivated primarily by inflation. It likely reflects attempts by employers to attract more workers; it appears to be out of reach for many employers to also compensate their workers for inflation. 

Yields Rise on Treasury Auctions

On the October 13 auctions for 4- and 8-week bills, and the "shortest" 30-year  bond (29 years, 10 months), the Treasury had to pay noticeably higher yields in order to attract buyers. 

The Treasury sold $62.7 billion worth of 4-week bills; at $152.7 billion in tender, the T/A ratio ended up at 2.44. This is down from 2.67 last week and the lowest in at least five weeks. The decline in T/A came with a rise in the median yield on the auctioned bills, from last week's 2.85 percent to 3.19 percent. 

Eight-week bills worth of $52.2 billion were sold at a median yield of 3.4 percent. This is up sharply from 3.15 percent a week ago, while the T/A dropped from 2.46 to 2.42. This is the lowest T/A in at least nine weeks. 

The Treasury also sold $18 billion worth of 30-year bonds. Buyers tendered $43 billion, placing the T/A at 2.39. This is down from the last auction on September 13, when buyers tendered $2.42 for every $1 accepted. The median yield at the 30-year auction rose from 3.45 percent last month to 3.85 percent.

The T/A ratio is one indicator of the market's willingness to purchase U.S. debt. The ratio has declined over the past ten years for both 10-year Treasury notes and 30-year Treasury bonds. Meanwhile, yields on both securities have increased.

The three auctions took place on the heels of the Social Security Administration's announcement of COLA adjustments in Social Security benefits. Fox Business reports that benefits

are set to rise by 8.7% in 2023, the biggest bump in four decades as stubbornly high inflation erodes the buying power of retired Americans ... The increase, known as cost-of-living-adjustment (COLA), is the biggest since 1981 ... It will increase the average monthly benefit by about $140.

The increase in COLA-adjusted benefits will put further pressure on the federal budget and contribute to a pessimistic outlook for the U.S. government's ability to balance its budget. 

U.S. Inflation Trending Down

 On Wednesday, the Bureau of Labor Statistics released its Producer Price Index numbers for September, Year over year, the PPI is up 14.3 percent, down from 15.5 percent in August and 17.2 percent in July. The September PPI rate is the lowest since February 2021.

Thursday, the BLS released its Consumer Price Index for September. Year over year, consumer prices increased 8.2 percent, down from 8.3 percent in August and 8.5 percent in July. The September CPI rate is the lowest since February this year. 

Consumer prices generally trend behind producer prices by a two-month lag. The amplitude in producer-price inflation is also considerably higher than in consumer prices. 

Producer price inflation has trended downward since its peak at 22.75 percent in November last year. We predict that the inflation rate will continue downward for the remainder of the year, albeit slower than thus far through 2022. 

Consumer price inflation peaked in June this year at 9.1 percent. Lagging producer prices, the decline in CPI inflation will continue for the rest of this year.

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