The United States held a 10-year Treasury bond auction yesterday. The amount auctioned was $42 billion, but the demand was relatively moderate with a “bid to cover” ratio of 2.40, lower than the average seen in recent months.
There were auctions in December and January, also for 10-year bonds, with a coverage ratio of 2.55 and even 2.65 last September.
And the “high yield” came out at 4.468%, its highest level in 15 months. As a reminder, the “high yield” in a Treasury bond auction is the actual yield that investors require today to buy that bond. It is determined by the auction: investors propose a price, and the lower the price they are willing to pay, the higher the yield. So yesterday, the US Treasury accepted offers up to a yield of 4.468%.
This is exactly what we are seeing right now: upward pressure on long-term US rates due to the rise in oil prices and more broadly energy, with a significant rebound in inflation preventing the Fed from resuming rate cuts.
Therefore, this borrowing is more expensive for the United States than recent issuances at lower yields: the higher the yields at the time of auctions, the higher the debt service (interest payments made each year) increases on new issuances and reopenings. Investors demand higher compensation to lend to the US government.
