Why Treasury Auctions Have Wall Street on Edge

The U.S. Treasury prefers its debt sales to be humdrum affairs. Lately, they are sparking fireworks in markets.  

Scrutiny of Treasury auctions—whereby the government funds operations by selling the world’s safest bonds to big banks and dealers—has grown alongside their size. For years, many in Washington and on Wall Street assumed that investors would buy any number of bonds the government issued, no matter the fiscal outlook. Testing that assumption: the sale of $20.8 trillion of new Treasurys in the first 11 months of the year—set to surpass 2020’s record of just under $21 trillion.

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Wall Street is holding its breath over a fifth consecutive round of Treasury auctions set to wrap up the week of Sept. 14. Treasury auctions are a regular occurrence, but this round is being viewed with increased concern due to some fundamental changes in the market.

The Treasury Department auctions securities each week for the purpose of managing the nation’s debt. Usually, markets are relatively forgiving when it comes to auction results, but investors are bracing themselves for volatility this week due to a number of factors.

The first factor is the economic fallout from the pandemic. Although the Federal Reserve has stepped up to provide economic support, the economic recovery remains sluggish, with rising unemployment and an uncertain outlook. That has led to a decrease in government revenues and the need for larger budget deficits. This, in turn, has caused the national debt to spike to an all-time high, leaving the Treasury department to auction off more securities than usual.

The second factor driving investor concern is the ripple effect caused by the low interest rates. The historically low interest rates weaken the dollar’s strength, pushing investors to seek higher yields in riskier investments. This added risk has led to the increased demand for Treasury securities, driving up the cost of borrowing for the government.

The final factor causing investors to worry is the threat of inflation. The government’s recent stimulus efforts have flooded the economy with cash, raising concerns about the potential for future inflation. If inflation takes off, the value of Treasury securities could decline and investors could stand to lose money.

All these factors have Wall Street on edge as the Treasury Department gears up to auction off $80 billion worth of securities this week, with the hope of raising enough money to cover the nation’s deficits. How the auction goes could have a major impact on the markets for weeks to come, so the outcome is anxiously awaited.

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