The 20-Year Treasury Dump and Stock Market drop
Yesterday's stock market drop was precipitated by the lackluster participation in the 20 year bond auction. Seems a bit overblown, but higher rates will be the new norm.
The Treasury auctioned 20-year bonds yesterday, and the showing was considered poor by market participants. That triggered a chain reaction of events, which spurred the stock market to drop by some 1.5% yesterday.
I feel that this is a bit overdone.
I get the Treasury’s email on auctions every day, and nothing is showing up from the email that suggests anything outlying:
Description: 20-Year Bond
Term: 20-Year
Series: Bonds of May 2045
Interest Rate: 5%
High Yield: 5.047%
Price: $99.407798
Allotted at High: 41.02%
Accrued Interest*: $2.44565
Total Tendered: $41,578,796,000
Total Accepted: $18,190,439,100
Issue Date: 06/02/2025
Dated Date: 05/15/2025
Original Issue Date: 06/02/2025
Maturity Date: 05/15/2045
CUSIP: 912810UL0*
Per $1,000
I receive this email every day there is an auction for all terms; nothing here stands out from any other day (See below).
Just now, I received today’s auction results from TreasuryDirect.gov for the 10-year TIPS, and the numbers are similar for tendered and accepted—price is interesting, however:
Description: 9-Year 8-Month TIPS
Term: 9-Year 8-Month
Series: A-2035
Interest Rate: 2-1/8%
High Yield: 2.220%
Price: $100.487511
Allotted at High: 37.79%
Accrued Interest*: $8.02933
Total Tendered: $42,499,078,200
Total Accepted: $18,000,018,400
Issue Date: 05/30/2025
Dated Date: 01/15/2025
Original Issue Date: 01/31/2025
Maturity Date: 01/15/2035
CUSIP: 91282CML2
Mostly, and interestingly, the lack of participation in the auction comes from US hedge funds that have had to reposition themselves from quantitative trades. Foreign participation is on par, no pun intended.
Simultaneously, Japanese bond yields have surged, doing so earlier this week. This could tip Japanese investors, notoriously avid savers, to opt for their own government debt instead of US Treasuries—loosening foreign participation and demand.
I do not see that as a compelling draw for two reasons:
Interest rates in the United States are still higher; and,
US debt still carries a relative zero risk in the sense that the bonds are guaranteed on the backs of US taxpayers.
The chart at the very top is the 20-year US Treasury price. The chart shows a sizable decline in price on the 20-year; already, there is a recovery in price. That is driven by the fact that interest rates are higher, and demand for the 20 at these levels is high.
This second chart is of SPY ETF. The market is printing a modest increase for today. Again, I feel as if yesterday’s price action was a bit overblown; today’s recovery iterates that.
That being said, interest rates are higher and will remain so.
Tariffs are a tax on consumption, and these costs will be shifted to the end-user: The consumer. There will be direct price increases for finished goods produced outside the United States and imported into the country. There will be secondary price increases for intermediate goods used to produce finished goods. This is inflationary, and likely the Federal Reserve will not be able to lower rates immediately.
Then, there is the deficit, which is beyond problematic, and the bond market is shouting very loudly in response. The tariffs are just one way the administration is trying to offset the costs of the tax cuts and overall budget increases.
The United States is re-entering a period of higher interest rates. The era of access to cheap credit is gone.
On the one hand, price pressures have been relatively subdued over the past two decades. The new ‘norm’ is in fact a return to the old levels of interest rates the economy was exposed to. But, this will equate to a shift in lifestyle for Americans.
Investing in that kind of economic landscape needs to take that into consideration. This is the continual transition I have been emphasizing throughout my content since the policy shifts have begun.
For now, the bond is coming back and price has popped higher for the 20. The stock market is likely to continue higher from here and recover some of its losses.
In no way do I see a pathway forward for a clear move above the February highs in the stock markets; I will continually stand on that. The economy has shifted. The stock market cannot move forward as it was in a landscape that is completely different.