Is Treasury Demand Drying Up?
Weak demand for US Treasury securities, as seen in recent auctions, signals rising concerns about the US government's ability to manage its debt and the potential for higher borrowing costs. This can lead to increased interest rates, financial market instability, and broader economic uncertainty.
The U.S. Treasury's $16 billion 20-year bond auction on May 21, 2025, experienced notably weak demand, signaling growing investor concerns over the nation's fiscal and monetary health. The resulting rise in yields impacted negatively on all the major stock indices – with the Russell 2000 (RUT) leading the way with a 2.80% decline. The Dow Jones (DJI) followed closely behind with a 1.91% drop.
The auction's high yield was 5.047%, slightly surpassing market expectations, and the bid-to-cover ratio - a key indicator of demand—was 2.43, below the average of 2.60 from the past ten auctions. This suggests that for every dollar of bonds offered, there were fewer bids than usual. The resulting yield pushed the 20-year Treasury rate to 5.127%, the highest since November 2023.
Investor apprehension is largely attributed to the U.S. government's escalating budget deficit and the potential inflationary effects of recent fiscal policies, including President Trump's proposed tax reforms and increased tariffs. These factors have led to a downgrade of the U.S. credit rating by Moody's, following previous downgrades by Fitch (during the Biden Administration in 2023) and S&P (during the Obama Administration in 2011). Additionally, concerns over the sustainability of long-term borrowing at elevated yields continue to dampen investor confidence.
While foreign demand for US Treasuries remained relatively strong, broader concerns persist, driven by looming tax and spend legislation in Congress that could significantly enlarge the deficit. While left-leaning Keynesian economists worry less about long-term deficits, continued long-term borrowing at high yields and weak auction results portend bad things for the American economy in general, and for social security and Medicare, specifically.
Unless lawmakers tighten fiscal policy or U.S. debt becomes cheaper for foreign investors, bond market stability will continue to decline – leaving a bloated Uncle Sam starving for more of other people’s money. Politicians and their Keynesian enablers have some hard decisions to make, as the can is no longer capable of being kicked down the road.
The Piper is already piping…
