Inverted Yield Curve Grows Stronger

There are no macroeconomic reasons for interest rates to rise on U.S. sovereign-debt markets, but they do. At Monday's auction on 13-week bills, the Treasury sold $62.86 billion worth of debt, attracting $154.73 billion in tender offers (T/A=2.46). This batch of three-month debt sold at a median yield of 4.51 percent, the highest rate since the start of the fiscal year. 

The rate on this maturity class remained around 4.2 percent for six weeks, through the holidays, until last week's auction pushed it up to 4.33 percent. Today's yield marked a jump comparable to the increases that took place 3-4 months ago, when rates generally started pushing into four-percent territory.

Due to the high yield on today's batch of 13-week debt, the auction raised the annualized cost of the debt by $680 million. The reason is entirely in the rise of the yield: from 3.42 percent on the maturing $63 billion to 4.52 percent on the new $62.86 billion. This debt-cost increase marks an acceleration compared to last three auctions, when the annualized cost hike has been $640 million.

The 26-week bill auction produced similar results. The $52.94 billion sold attracted $123.83 billion from investors (T/A=2.34) with a median yield of 4.64 percent. Since the maturing batch of $47.6 billion came with a yield of 2.625 percent, the auction's increase in the debt cost of $1.207 billion is attributable predominantly to a significant increase in the interest rate. 

Here, again, the rise in the interest rate marks the end of a multi-week stability. Rates at 26-week auctions were stable around 4.5 percent for six weeks, until last week it rose to 4.58 percent. Today's 4.64 percent is high enough to cause an acceleration in the increase in the debt cost. Last week, the annualized increase was $1.128 billion; the week before $1.088 billion.

The higher rates at these auctions reflect an ongoing trend in the secondary market for U.S. debt, namely a sharpening inverted yield curve. In Figure 1 below, the dark green line represents yields as of January 9, with two earlier dates included for comparison:

Figure 1

Source: U.S. Treasury

One possible explanation for this is that investors are trying to secure a reasonably high yield for the long term, abandoning short-term securities where the market is more speculative by nature. However, if this is the case in the secondary market, it does not appear to be the case at auctions. If it were, the tender-to-accept ratios for both the 13- and the 26-week bills would be plummeting. They are not.

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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.