TREASURIES-US yields surge after 30-year auction disappoints, hawkish comments from Fed’s Powell
By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 9 (Reuters)
U.S. 30-year auction comes in weaker than expected . . .
Indirect bidders, which include foreign central banks,
took 60.1%, down from 65.1% in October and the 68.6% average. . . .
Analysts described the auction as “terrible” and “ugly”.
Yesterday, the US 30-Year Treasury yielded 4.64%.
Investors were willing to buy 30-Year bonds even if they pay (only) 4.64%.
But we keep going in debt that means from time to time the Fed has to auction off more bonds. Today it tried, and failed to auction off $24 b worth of 30-Year bonds. Investors bought only 60.1% of them and insisted on 4.77% for them.
That in turn caused “long bonds” to lose about 2% of their value in 5 minutes.
The market is going to price in a higher yield on trades of existing bonds, which will begin to feed a cycle of selling by investors, just wait until the un-astute investor, in a bond fund (instead of holding the actual debt instrument), sees their next quarterly statement.
True, millions of seniors have learned recently (and millions more will learn in the coming months) that “Bonds are safe” means “bonds are safe if and only if you hold until maturity.”
Except that unfortunately it includes many astute investors who are are not individuals with retirement dates but
pension funds,
banks,
insurance companies, and
university endowments.
They tend to hold a lot of long term bonds. They too will find their holdings losing value.
Pension funds, that’s why Liz Truss could not outlast a head of lettuce.
The pension funds are a whole new layer of pain. Many are considered extremely under funded compared to future expected benefit demands. This is going to cause significant issues in their projections of solvency. That will raise the funding requirements and put stress on companies already having trouble meeting funding requirements.
A 60 year-old man switches most of his portfolio from stocks (risky) to bonds (safe.) Because long bonds pay more interest than short bonds he chooses 20- and 30-year bonds.
Ten years later (age 70) he needs to cash out part of his retirement portfolio, so he wants to sell some of the bonds. ----WHAMMO! He learns the hard way that with long bonds there is a substantial. penalty for early withdraw and right now that penalty is HUGE.
Long bonds are a favorite investment vehicle for pension funds, insurance companies etc… Right now all pensions fund are experiencing the same demographic stress SS is (retiring baby boomers) & some are finding out “Wow. Periodically, the penalty for selling those things is really really big. We should not have bought so many long bonds.”
Same issue already seen by the banks in their bond portfolios. If you are holding to maturity, it is only an unrealized loss, which will become smaller and smaller as the bonds get closer to maturity. But if you have to sell, oh boy!
My intention was to show that:
Seniors might be less-likely to buy long bonds (thus be less vulnerable) because they might know the risk of buying a bond that will outlive them.
By contrast, state pension funds, private pension funds, banks etc. had planned on “living forever” so they might be even more heavily-invested in long bonds and thus even more vulnerable
And many companies, including several household names are likely to take a “double hit.”
They rate they must pay to borrow or refinance will rise
Once, as the yield curve un-inverts,
Again, because their rates have not changed since the Fed started raising short-term rates.
Cuts in consumer spending due to maxing out personal credit, coupled with higher debt service to refinance vs taking a hit from corporate cash reserves to retire debt. Some of these companies won’t survive.
