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Macroeconomics

03 September 2019

A US ULTRA-LONG BOND AND FALLING BID-TO-COVER RATIOS 

Only 10 days ago, investors balked at the launch of the 30Y Bund.

The zero coupon bond was not well received by the markets and not even half of the amount of offered paper received a bid. Running the risk of a flop is not exactly what the Secretary of the US Treasury Mr Mnuchin, is willing to take. And yet, he’s also considering the issuance of an ultra-long bond with a 50 or even 100-year tenor. But if a country like Austria, by all means no match for the US, can get away with it, why wouldn’t Uncle Sam be able to clinch a successful auction?

Let’s assume Mr Mnuchin is a smart guy. Then surely he must have noticed that the recent 7-year Treasury bond auction did not go down well. The bid-to-cover ratio for the $32 billion auction fell to the lowest level since 2009. Some say that 7Y maturities have never been hugely in favor with investors, but when looking at the past 5Y auction, there too, the bid-to-cover ratio fell and reached the second lowest level since 2009. The lack of interest from investors can be seen across the curve, even if over the past months there has been a global bond bonanza.

The simple fact is that US debt is spiraling out of control. With more than $22 trillion debt and rising, some ask how this is going to evolve. More infrastructure spending and additional tax cuts are still on the menu and waiting to be implemented. And though any form of bi-partisanship is hard to find, it seems mostly to exist because a few Democrats and Republicans appear to worry about the quickly rising debt levels. With merely 14 months to go until the next presidential election, frugality is not the leitmotiv on either side.

Yet after 2020, the bill presented to the next sitting president will not look pretty. Is that the reason why bond investors are starting to shun bond auctions? Perhaps bond markets are sending an early message.