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Are the bond markets finally running out of patience, and cash?

The bond markets may be suffering from a short bout of 'indigestion', according to one commentator

The dollar may strengthen as yields rise

The answer is yes, and no.

To some degree the bond markets are running out of patience, yes. But no, they are not running out of cash. Not just yet.

It is true to say, however, that the bond markets are becoming more responsive to normal economic pressures than they were a few months ago, where the safe haven of long-term government debt looked like the only place to be in a world of increasing financial chaos.

Now that things are starting to return to something approaching the old normal, taking a hit to secure that safe-haven status no longer seems justified.

Hence, the US government’s sale of US$112bn of long-dated 30 year debt this week didn’t go as well as had been hoped. Or not as well as the government had hoped, at any rate.

One of the main underlying premises of the endless array of stimulus packages that we’ve seen over the past several months has been that because interest rates and yields are so low, borrowing huge sums is not only necessary as a response to the crisis, it’s also rational.

The latest 30-year debt issue looks to have put that recent market dynamic to bed. The US government was forced to concede a greater yield to investors in order to get its debt to sell. That means firstly that an orderly market is beginning to return, and secondly that further rounds of stimulus may well be tempered.

On the other hand, shorter-term debt remains slightly easier to sell on better terms from the government’s point of view. This may, in part, be because investors reckon that over the shorter horizon the massive easing programmes won’t be able to have as great an effect on real returns. Or to put another way, there is less opportunity in the short term for governments to engineer an inflationary environment to reduce the real value of the debt.

Some commentators, though, did take the higher yields on the latest 30-year bonds as a sign that there’s a tightness in the market in terms of available cash to lend long-term.

“The record 30-year US bond auction saw weak demand on Thursday, hinting that the heavily swamped debt market couldn’t absorb the additional debt easily,” wrote analysts at Swissquote Bank.

Primary dealers took a larger than average share of 28% of the bonds, indicating tepid demand from investors. The bid-to-cover ratio of 2.14 times was the lowest since July 2019.

One commentator at Wells Fargo referred to the lack of appetite for the bonds as “a little bit of market indigestion.”

There’s also the possibility that since the US Treasury stated publicly last week that it’s going to be issuing much more longer-term debt in order to help deal with the coronavirus crisis, markets know that from here on in it’ll be a buyer’s market. Why rush in now, when yields could yet go even higher?

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