Re: 5.033%

An open letter to the Treasury

Dear Mr. Secretary,

Wednesday afternoon your department sold $70 billion of five-year notes at 5.033%. The screen had them at 5.002% moments before the gavel. That is a tail of 3.1 basis points against a six-auction average of 0.6. Bid-to-cover came in at 2.21 where the recent norm is 2.33. Indirect bidders, the foreign accounts and fund complexes who are meant to be the quiet backbone of this whole arrangement, took 54.3% of the paper against an average north of 65%. Primary dealers were left with nearly 16%. You don't need a bond desk to read it. The guests sent their regrets and the house ate the buffet.

I write because the morning-after consensus has settled on calling this a Fed story. Governor Barr said further policy adjustments are likely needed. S&P Global's composite PMI printed 58.4, the highest in over five years, with input and output prices at multi-year highs. Brent rebounded 3.9% to settle at $103.08 after five straight down sessions. All true, all in the tape, and all of it nudged the market toward a second hike, which futures now price at about 70% for October. But please look at which line of Wednesday's ledger carries your department's letterhead.

The 5-year crossed 5% for the first time since 2007, and it did so on your auction. The 10-year closed at 5.11%, a 19-year high, after touching 5.14%. The 2-year jumped 13 basis points past 4.9%. The 30-year poked 5.37% again. Meanwhile the Fed funds rate sits at 3.75-4% after last week's hike, so the 10-year now trades well over a full percentage point above the policy rate. That premium isn't the market pricing the Fed. It's the market pricing you, and everyone else who needs to borrow.

Consider the buyback. Your department announced Wednesday another operation of up to $6 billion for Thursday, part of the expanded series that allows up to triple the standard size. It is a tidy piece of plumbing, and I have no quarrel with the engineering. But $6 billion into a market north of $30 trillion, on the same afternoon that $70 billion of new supply cleared three basis points cheap, amounts to bailing with a teacup while the calendar runs the tap. Analysts quoted by CNN said the program is too small to matter against forces this large, and I struggle to disagree. Truist's fixed income desk called Wednesday a perfect storm, and the storm did not consult the buyback schedule.

Now widen the lens, because your problem has company. The Institute of International Finance put global debt at a record $365 trillion in the first half of the year. Advanced economies paid over $3.5 trillion in interest on internationally traded bonds across the trailing twelve months. Hyperscalers are issuing debt to build data centers at a pace that made a hundred-year bond look like a footnote. Every one of those borrowers is asking the same pool of savers for the same dollars, and the pool has noticed it has pricing power. Your Treasury is the senior borrower in that queue, and seniority has lately meant paying up first.

The equity market, meanwhile, is conducting a seminar in denial. On Tuesday the Nasdaq closed at a record and the S&P 500 sat 0.4% below its own August peak. Wednesday's damage was 0.75% for the S&P at 7,706, 1.1% for the Nasdaq at 26,936, and 352 points for the Dow. That's a polite response to the highest long-term risk-free rate since before Lehman. The S&P is still up about 14% on the year, which tells you exactly how much of the rally has been financed by not looking at the 10-year. Gold, the asset supposedly built for a moment like this one, fell nearly 2% toward $4,283 during the session, because a jump in real yields punishes everything that pays nothing. Even the 30-year mortgage has reached 7.12%, the highest in more than two years. Someone should tell the housing market it isn't invited to the melt-up.

Thursday, I gather, will be devoted to theater. President Trump hosts Xi Jinping at the White House, with a state dinner where Jensen Huang, Sam Altman and Sundar Pichai are on the guest list. The agenda covers the trade truce, AI controls and Taiwan arms sales, and futures are flat while traders wait for a headline. The Iran file offers the same pageantry: a threat of annihilation from the UN podium on Tuesday, followed by talk of "very good" side meetings, and a crude tape that lurches between the two. I understand the appeal of watching a summit. A summit costs nothing to watch, and every dollar of the deficit runs through the queue behind it.

The seven-year note is due later this session, and jobless claims land first at 8:30. Here is my modest request. Before the desks start writing about oil and the Fed for the third day running, would someone in your building acknowledge that the price of duration is being set by the people who own it? They just told you, three basis points at a time, what they think of the supply.

Respectfully,

A holder of duration, for now