Those Poor U.S. Bond Auctions Are Adding Up

By any credible measure, the U.S. has become less creditworthy under President Donald Trump. Total debt outstanding has risen by $2 trillion to $22 trillion since Trump took office at the start of 2017, and the federal budget deficit has expanded to 4.5% of the economy, the most since 2013. Larry Kudlow, who is Trump’s top economic adviser, said Tuesday that the expanding debt load is “quite manageable" and not “a huge problem right now.” Maybe not now, but the trend at the U.S. government’s bond auctions isn’t encouraging.

Investors submitted bids for 2.39 times the $38 billion of three-year notes offered by the Treasury Department on Tuesday, the smallest so-called bid-to-cover ratio for that maturity in a decade. This is no anomaly. In May, the bid-to-cover ratio at a 10-year auction was also the lowest in a decade. These are far from failures, and plenty of other factors besides creditworthiness go into investors’ decisions about whether to participate in a bond auction. At the top of the list is monetary policy. But that’s the thing — the Federal Reserve has turned dovish, suggesting an interest-rate cut could come as soon as this month. And while U.S. yields are low by historical measures, they are still higher than investors can get anywhere in the sovereign bond market in developed economies. Even so, foreign holders have cut their holdings to about 40% of the marketable U.S. debt outstanding, from more than 50% before the financial crisis. It’s hard not to come to the conclusion that demand for U.S. bonds isn’t limitless, which is a scary thought with the government on track to borrow $1 trillion to finance a budget deficit by the same amount. Expect to hear more about U.S. borrowing in coming months. Strategists expect the Treasury to exhaust its borrowing authority in late September or early October.