The insane quantity of debt issuance coming out of US Treasury has not spiked yield’s on debt yet, but at some point, probably will. In 2017, the US Treasury issued $8.522 Trillion of debt securities. That money was used to refinance loans coming due, and to issue new loans; basically, paying off one loan with another. At what point do buyers of US Treasury debt demand a higher return to borrow money to the US government? When do they start to question the “full faith and credit of the US government”? When do investors have an “aha” moment, like they did when Nixon got rid of the Gold standard? The key is to watch the results of US Treasury auctions, which are happening weekly, due to the quantity of debt being issued. You can find auction results here, at the US Treasury Direct website. Listed are newly issued debt/bonds. You can filter through them by the duration of the bond. Treasury auctions are just that, bond auctions. Investors bid on these bonds by asking for a certain interest rate to buy them.The two things that are important here are the high yield, and the interest rate.
“At the close of an auction, Treasury awards all noncompetitive bids that comply with the auction rules and then accepts competitive bids in ascending order of their rate, yield, or discount margin (lowest to highest) until the quantity of awarded bids reaches the offering amount. All bidders will receive the same rate, yield, or discount margin at the highest accepted bid.” (From TreasuryDirect.gov)
There are two type of bidders at auction. One is the competitive bidder. The other is the non competitive bidder. The competitive bidder bids on the auction by telling Treasury what yield he/she would accept in exchange for buying the bond. He/she also tells Treasury how much he/she is willing to buy. All competitive bidders, if their bid was accepted, ultimately receive the highest yield that was accepted by the Treasury.
The non-competitive bidder only tells treasury how much he/she is willing to buy. As for the yield he/she will get, it is the average of all accepted bids from competitive bidders.
The interest rate of 2.75% is the average of all the yields that were bid in the competitive bidding. This yield is what non-competitive bidders receive.
The High Yield is the highest yield bid that Treasury accepted. This yield is the yield all competitive bidders will receive. The Median Yield and Low Yield are not granted to any investor, but they are listed in the result sheet so people can see what the lowest accepted bid yield was and what the median accepted bid yield was. The competitive bidders who bid these values STILL get the high yield.
Notice in the footnotes, the document shows something called the Bid-to-Cover Ratio. This number is extremely important. The bigger the number, the better. It tells us how much competitive bidders were willing to buy, versus how much the Treasury was offering. The bigger the number, the greater the demand, the lower the interest rate. It’s simple supply-demand theory. At 2.65 Bid-to-Cover, this auction went really well.