The U.S. long-term Treasury auction is coming this week  

Global investors' resistance to long-term government debt has turned the once-routine U.S. long-bond auction into one of the most closely watched events on Wall Street this week.

 

Just over two weeks ago, weak demand in the 20-year Treasury auction triggered a surge in Treasury yields that day. If the auction of 30-year bonds, a global benchmark, performs similarly, it will undoubtedly raise more concerns.  

The U.S. Treasury will auction $22 billion worth of 30-year Treasury bonds on Thursday as part of its regular borrowing program.

 

However, the results of this auction are destined to receive special attention, as they will immediately reflect the current demand situation in the U.S. Treasury market, where investor interest in 30-year Treasury bonds has recently cooled.  

 

"All auctions will be seen as windows to test market sentiment. It feels like the U.S. 30-year Treasury bond is the most unpopular bond right now," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.  

In recent weeks, yields on long-term bonds globally have soared as investors, worried about spiraling debt and deficits, have shunned these securities and demanded higher risk premiums for lending to governments. 

 

Higher yields mean greater financing pressures, at a time when the U.S. government's borrowing continues to increase and government spending remains high.

 

The version of the Trump administration's tax and spending bill passed by the House of Representatives last month is projected by some institutions to add trillions of dollars to the U.S. budget deficit in the coming years. Moody's also downgraded the U.S. sovereign credit rating from Aaa last month.  

 

In addition to the 30-year Treasury auction on Thursday, the Treasury will also auction $58 billion worth of 3-year Treasury bonds on Tuesday and $39 billion worth of 10-year Treasury bonds on Wednesday.  

U.S. Treasuries still face selling pressure

Given the current situation in the bond market, the recent sharp rise in Treasury yields may attract some buyers. McIntyre of Brandywine Global Investment said he recently bought 30-year bonds with yields around 5%, a level some find attractive.  

 

However, for many, even with improved prospects for short-term bonds against the backdrop of expected Federal Reserve rate cuts in the second half of the year, long-term yields are likely to remain high in the foreseeable future.  

 

Greg Peters, co-chief investment officer at PGIM Fixed Income, said it would be safer to avoid long-term Treasuries given that they are increasingly tied to political forces rather than monetary policy.  

 

"Look at what's happening in the long-term interest rate market: it's becoming disconnected," Peters, who manages $862 billion in assets, said in an interview last Friday. "It's being driven by risk premiums, politics, and all these other factors."  

 

Another factor affecting demand for U.S. Treasuries recently is a controversial provision in Trump-backed tax legislation — the "Section 899" clause. The clause would allow the U.S. to impose additional taxes on businesses and investors from countries it deems to have "unfair" tax policies, sparking concerns about a boycott of U.S. Treasuries by overseas buyers.  

 

JP Freire, a spokesman for the House Ways and Means Committee, has said the retaliatory tax would not cover interest on portfolio investments such as U.S. Treasuries, but questions remain.