Treasury Auctions Were a Red Flag for TLT Investors

Treasury Auctions Were a Red Flag for TLT Investors

The lack of big buyers at last week's two sales may mean that rates will go even higher.

Reviewed by: Staff
Edited by: Mark Nacinovich

What if they held a U.S. Treasury bond auction and no one came?  

Relatively speaking, that’s what occurred twice last week. As the U.S. government tries to continue kicking the fiscal can down the road, issuing new 10-year and 30-year Treasury bonds amid a high and growing $30 trillion debt burden, a rare situation developed. The usual buyers were absent. 

The situation might just be one of those largely overlooked events that investment advisors and investors look back at and say, “That’s when we knew rates were going much higher.” 

Those who are active in the ETF marketplace have noticed the recent frenetic price action in the iShares 20+ Year Treasury Bond ETF (TLT). Much of that volatility has been from the price attempting to bounce back from a 20% decline the past six months. 

During that time, the 10-year Treasury yield, widely considered the primary gauge of the bond market’s trend, has flown higher from 3.3% to 4.6%. That’s the type of move that can take years. But nowadays, everything happens faster in the bond market. And that is something investors and financial advisors are quickly getting accustomed to. 

Worries About Long-Term Rates

Last week’s auctions of longer-term U.S. Treasury bonds showed such weak interest in lending to the home of the world’s “reserve currency,” it casts some significant doubt and worry about how high long-term rates will need to go to eventually satisfy investor demand. 

A big part of the problem is that three historically large buyers of U.S. bonds are motivated to do things other than buy like they used to. Japan and China are moving more assets back to their home economies, and thus are less willing to buy U.S. bonds at what still may be insufficiently high rates in exchange for decades of indebtedness. 

Of at least equal significance is the changed posture of the Federal Reserve regarding U.S. long-term Treasuries. Not too long ago, the Fed was the chief buyer, soaking up whatever U.S. debt issuance it had to, suppressing interest rates.

Nowadays, however, the Fed is more focused on fighting inflation, and instead of reinvesting when bonds they hold mature, it takes the money and doesn't reinvest it in newly issued bonds. The lack of the Fed’s formerly reliable bid is another issue pressuring the bond market. 

TLT Drops Initially

Thursday’s auctions caused a large drop in TLT, but it recovered more than half of it on Friday. The Israel-Hamas conflict is another new factor that could at least temporarily drive long-term Treasury yields down (and the price of TLT up). But what investors have to ask themselves is how long does that “flight-to-safety” concept overwhelm the longer-term problems of weak demand for U.S. long-term bonds. 

The one statistic from last week’s 30-year auction that shows something different is happening in this vital part of the financial markets is the percentage of securities auctioned that bond dealers had to buy. They do that when no one else will take them. Typically, that figure is around 11%. At last week’s auction, it was 18%. This bears watching for bond investors, pun intended. 

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.