Rising risk around tariffs, slower growth, higher inflation and lower rates are creating conditions where investors appear to be shying away from long-dated debt.
The new aversion to long-dated debt comes as the U.S. dollar has fallen by more than 10% this year against the euro and yen, and by more than 8% against a basket of trading currencies.
It’s all happening as American trade policy points toward a withdrawal of Washington from the center of the global economy.
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From out vantage point, the dollar’s role as the primary reserve currency is a privilege and not a burden, and the benefit of maintaining that status overwhelmingly outweighs the costs.
Any potential curtailment or end of that status will only result in higher costs of issuing debt, both public and private.
Given current debt, deficit and fiscal dynamics in the United States, the idea of a buyers’ strike at the long end of the Treasury curve cannot be discounted.
While the sale of short-term Treasury notes has recently been solid if one looks at both direct and indirect bids, the talk surrounding long-term debt purchases suggests some risk of higher yields in the short term.
Investors will get a clearer picture next week in the reopening of 10-year notes on June 11 and a 30-year reopening on June 12, which will be the first chance to ascertain if that is just talk or is translated into action.
The direct bid on the most recent U.S. 10-year float was 19.9% and the indirect was 71.2%. The bid-to-cover ratio was 2.6% and the high yield rate was 4.34%.
The previous 30-year reflected a direct bid of 27.2% and an indirect one of 58.9%. The bid-to-cover ratio was 2.31% and the high yield rate was 4.819%.
While net shorts on dollar positions have proliferated in recent weeks, one can observe a similar dynamic inside the domestic Treasury market. Net short positions on 10-year Treasury futures are elevated at 15% of net interest. This underscores the risk of higher yields amid soft demand for U.S. issuance.
The curve-steepening trades, where investors purchase the short term and sell short long-term debt, are part of a quickly evolving mosaic across the global fixed income market.
Those trades if prescient will send yields higher, making the cost of financing all debt including the large tax cuts currently under consideration by Congress.
