Markets with Megan

When it comes to the stability of financial markets, the significance of Treasury auctions cannot be understated. In the realm of investment, these auctions serve as a crucial barometer for gauging demand for U.S. debt. The alarmingly weak demand exhibited in recent Treasury auctions for two, five, and seven-year notes has triggered a series of reactions, culminating in heightened yields and unsettled equity markets. This emerging pattern raises critical questions about the future of market stability and investor confidence.

Diving deeper into the mechanics, the bid-to-cover ratio, a traditional indicator of auction success, has plummeted to levels unseen in years, revealing a stark decrease in investor appetite. This trend is particularly troubling considering the burgeoning U.S. deficit and the increased issuance of Treasury bonds intended to bridge the financial gap. As the government grapples with expanding fiscal imbalances, the waning demand for Treasury bonds is setting the stage for a precarious financial outlook.

Investors must now navigate a landscape where rising yields are becoming an inescapable reality. The implications of this shift are far-reaching; mortgages and loans, for instance, are closely linked to Treasury yields. As such, the bond market's turbulence spills over into the broader economy, affecting borrowing costs for both individuals and businesses. The reverberations of this dynamic are felt across asset classes, prompting investors to reassess their strategies and risk exposure.

Today we're going to talk about something a little bit different. While we usually focus on economic news, today we're going to talk about some of the most recent Treasury auctions that we got. Hello, this is Megan Horneman. It's Wednesday, may 29th, and we're here with our regular segment of Markets with Megan. So why do we want to talk about Treasury auctions? Well, because they're market-moving this time.

These typically aren't big market moving events. This is when we auction off treasury debt in order to fund our deficit and typically we get quite good demand on this treasury debt. But what we've seen over the past year is that these have been really kind of volatile, these auctions, and it's creating some uneasiness in the market. This week we got auctions for the two five and seven-year treasuries and what we saw was that the demand was weaker and we're issuing more debt in order to fund our deficit. So when that happens, prices of bonds go down and the yields go higher. What happens there is the equity markets don't like it, and that's what we've seen for the past couple of days. So let's just dig into a couple of these auctions. All three of these auctions had a tail, which means that the yield at the auction, or the actual yield that came out was higher than what was anticipated, so that shows weak demand. The bid to cover ratios this is the amount of bids or offers to buy these bonds versus the amount that were sold All of these were weak.

The two-year was the lowest since November of 2021. The five-year was the lowest since September of 2022. And then the seven-year was the lowest since April of 2023. The markets, as I said, don't like this. We need people to buy our treasury debt because our deficits are not going anywhere but worsening, and if we don't have buyers of that, we're going to be seeing higher yields across the board. What higher yields in the treasury market mean? Well, think about it. Mortgages are linked off of this, loans are linked off of the treasury market, so this is a negative here for the equity market as well as the bond market. We'll be back tomorrow. That's all we have today for this. The auctions are done for the week, but we'll be back tomorrow and Friday with some more economic news, including the much anticipated PCE deflator, which is the Fed's preferred inflation gauge. Thank you.