Inverted Yield Curve Steepens

Yesterday the Treasury sold $66.42 billion worth of 13-week bills. With $167.13 billion tendered, the T/A landed at 2.52. The auction produced a median yield of 4.54.

At the 26-week auction, the Treasury received $137.45 billion in tender offers for $53.13 billion accepted (T/A=2.59). 

Today, Tuesday, the Treasury turned its attention to the 52-week bill and the 2-year note. Under the former, investors tendered $101.23 billion for $37.64 billion accepted. The T/A of 2.69 was a drop from last month's 2.98 but pretty much in line with November, October, and September. The median yield was 4.42 percent. 

 Selling $42 billion under the 2-year maturity, the Treasury received $123.65 billion in tender (T/A=2.94), and a yield of 4,1 percent.

Today's auctions added $3.09 billion to the annual cost of the debt. Yesterday's auctions contributed an annualized $1.62 billion, adding up to an annualized $4.71 billion. 

The sharp rise in today's debt cost originates in a heavy rollover-based increase in the interest rate:

The maturing $37.4 billion batch of 52-week bills yielded 0.61 percent;

The maturing $66.8 billion batch of 2-year notes yielded 0.11 percent. 

The $1.655 billion rise in debt cost from the 2-year auction came despite the fact that the Treasury sold a new batch that was $24.8 billion smaller than the maturing one. Since the one-year auction largely maintained the debt under that maturity—the new batch was $240 million bigger than the maturing one—its $1.44 billion addition to the debt cost was purely the result of higher interest rates.

As of Tuesday January 24, the estimated average interest on the federal debt is 2.28 percent, up from 1.87 percent on October 1 last year, the start of the current fiscal year.

The inverted yield curve is becoming more pronounced. Figure 1 reports a longer comparison including January 24, December 23, and November 25:

Figure 1

Source: U.S. Treasury

Despite the rising cost of short-term debt, the Treasury continues to increase debt under short maturities, adding $5.33 billion under the 26-week bill. Simultaneously, it drops sales under longer maturities: the 2-year auction sold almost 40 percent less debt than the maturing batch. 

We will discuss this trend again in our weekly podcast on Friday.

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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.