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Treasury market fired a warning sign

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The equity market wobbled upon the release of the CPI data, which showed inflation improving in the Core CPI component, but shelter and gasoline costs remain a concern. Hotel prices also went up after dropping in past releases.

Despite this, the stock market took comfort that Core CPI is trending down, giving the market a sign of relief as the S&P 500 tried to regain footing in a highly volatile session.

Nonetheless, a bad auction ignites fear of 2022 when the Treasury yield went up in an upward spiral. Let us spend some time understanding what happened during the afternoon trading session.

Primary dealers took up the slack.

During a treasury auction, the primary dealers who tend to purchase the supply not bought by other bidders had to take in 18.2% of the debt released on Thursday.

This is a jump from Feb 2022, where we see a bond market rout. In 2023 thus far, the average was around 10.72%. As such, it points to one single message: a low demand for Treasury bonds.

What’s more concerning is that it took a yield of 4.837%, which is 4 basis points higher than expected before the actual auction. The gap is often known as the “tail”. When we see higher tails at auction, it simply means that the issuance government had to provide a higher rate- a premium above the market rate on their bonds to attract investors.

That’s a warning sign for the US government to get its house in order and restore fiscal prudence.

We are seeing investors taking a back seat on their purchase of Treasury bills, given their worry about heightened volatility and predicting the Federal Reserve’s next move.

High deficit a background concern

Despite being the world’s largest reserve currency, the good faith of trust in the dollar is running out of favour in times of global uncertainty, geopolitical tension and deteriorating globalisation in trade. The US government, through September, had issued around $15.83 trillion in Treasuries, which is a giant leap from $12.53 trillion in the same period last year. Simple economics point to the higher supplies that dampen prices and elevate yields.

If the US government maintains loose spending behaviour, a debt crisis might be brewing.