How Much Demand For Treasuries Exists?
Treasury may find itself in a sticky situation soon if it has another weak 10-year Treasury auction (next 10-year auction is this Wednesday July 10th). U.S. Treasury securities are not exactly the high quality debt instruments they were years ago in the pre-QE, pre- Trillion dollar fiscal deficit years. Yields will move higher if demand is weak. I’m not sure as to the demand level for this forthcoming $39 billion 10-year auction. I am quite confident that there will not be great demand for Treasuries when some $2 Trillion will be issued at the end of the fiscal year to plug the fiscal 2024 deficit.
I recently mentioned that the Fed will likely be a buyer of Treasury debt this autumn when Treasury Secretary Janet Yellen (Not exactly a serious financial person. Whoever heard of a Treasury Secretary who pretends that Trillion Dollar fiscal deficits and $35 Trillion in Treasury debt does not exist?), will issue approximately $2 Trillion in new Treasury debt to plug the fiscal 2024 deficit for the year-ending September 30th 2024.
We have a 10-year Treasury auction coming up this Wednesday July 10th which should be interesting in terms of the demand level. Details may be found here for this $39 billion offering.
My view is that when autumn rolls around, new Treasury issues will outpace demand, thereby pushing yields higher, especially for the 10-year and other longer-term Treasuries. In addition, this puts pressure on the Fed to lower rates soon as Treasury will finance the Federal Government with short-term paper, and the United States can’t afford short-term paper given where rates are. I believe that the Fed will cut and that it will cut quickly to get Fed Funds down to 2% in short order and perhaps even 1% in short order. I do believe that the Fed will revisit the zero bound on the Fed Funds Rate in 2025.