treasuryLast week, the U.S. Treasury auctioned $258 billion in bonds. Treasury auctions are the way the United States government finances its debt. The Treasury sells short-, intermediate-, and long-term IOUs, known as bills, notes, and bonds. When investors and governments purchase bonds, they agree to lend money to the United States. In return, the United States agrees to pay an amount of interest over a certain period of time. At the end of that time, the government is expected to repay the money borrowed.

The price and interest paid on U.S. government debt is determined by supply and demand. When there are few bonds and a lot of demand, prices rise and interest rates fall. When there are a lot of bonds and little demand, prices fall and interest rates rise.

Last week, Barron’s reported, “The law of supply and demand meant that the glut of new Treasuries temporarily drove down prices and pushed up yields. The 10-year Treasury climbed during the week – brushing 2.95 percent – but ultimately lost half a basis point, ending at 2.87 percent. (A basis point is a hundredth of a percentage point.)”

The Treasury increased its debt issuance to fund tax reform and the two-year federal budget. Reuters reported, “…tax reform is expected to add as much as $1.5 trillion to the federal debt load, while the budget agreement would increase government spending by almost $300 billion over the next two years.”

A surplus of Treasury bonds, in tandem with decreased demand as the Federal Reserve reduces the holdings it accumulated during quantitative easing (an unconventional monetary policy in which a central bank purchases government securities in order to lower interest rates, increase the money supply, and stimulate the economy), could push Treasury rates higher. In addition, MarketWatch reported the Federal Reserve appears to be committed to gradually increasing the Fed funds rate to avoid an overheating economy and keep inflation down.

Higher interest rates may be coming.

screenshot 2.27.18

Sources:

https://www.barrons.com/articles/treasuries-undergo-a-glut-check-1519438243 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/02-26-18_Barrons-Treasuries_Undergo_a_Glut_Check-Footnote_1.pdf)
https://www.treasurydirect.gov/instit/auctfund/work/work.htm
http://www.morningstar.com/cover/Classroom.html (Click on Bond Curriculum, Buying Bonds, Things to Consider When Buying Bonds) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/02-26-18_Morningstar-Things_to_Consider_When_Buying_Bonds-Footnote_3.pdf)
https://www.investopedia.com/university/economics/economics3.asp
https://www.reuters.com/article/us-usa-auctions/jittery-u-s-bond-market-braces-for-supply-wave-idUSKCN1G20UH
https://www.marketwatch.com/story/fed-minutes-stronger-outlook-increases-the-chance-of-more-rate-hikes-2018-02-21