Bond traders are either very afraid or very reckless. Despite a collapsing U.S. economy and a federal budget deficit that’s forecast by the Congressional Budget Office to triple to $3.7 trillion this fiscal year, the government is having no trouble borrowing. That was evident in the $190 billion — $190 BILLION! — of Treasury bills and notes the government sold on Monday.
Each of the four separate auctions met with above-average demand. The star of the day was the auction of $42 billion of two-year notes. Investors bid for 3.1 times the amount offered, the highest so-called bid-to-cover ratio since January 2018. There’s no question that the U.S. fiscal situation has deteriorated, and will likely only get worse. Besides that bulging budget deficit, the U.S. has seen its total debt outstanding jump to almost $24 trillion from less than $10 trillion during the financial crisis. And that’s before accounting for the trillions of dollars the government will need to borrow to finance its economic rescue packages. Of course, there’s always a chance that a surge in supply will overwhelm demand, sending borrowing costs soaring and leading to major losses for bondholders. But that’s been a concern since time immemorial when it comes to the U.S. debt markets. It’s why the bond vigilantes have gone extinct. The better way to interpret the auction results is that despite the recovery in stocks in recent weeks, investors are worried that there will be a long, slow and painful recovery marked by the greater threat of deflation than inflation. After all, why else would anyone agree to lend money to the U.S. government for five years at an interest rate of just 0.394%?
