The $22 billion bond sale, scheduled for 1 p.m. New York time, is part of the government’s regular borrowing. However, the sale comes as Congress considers President Donald Trump’s massive tax bill, which some forecasts say will add trillions to the U.S. budget gap and may require more bonds to finance the spending.
That backdrop, along with concerns that the president’s trade war could reignite inflation and generally dampen global demand for U.S. assets, has hit the longest-dated Treasuries in particular. Investors have grown more cautious about lending to the U.S. government for long periods, demanding higher yields, adding to a cushion known as the term premium.
An unexpectedly poor response to an auction of 20-year bonds last month led to a bond market sell-off that sent 30-year yields as high as 5.15% in May, just below their highest level in nearly two decades, and triggered a drop in stocks and the dollar. An auction of 30-year bonds last month also saw slightly weaker demand.
“Given what happened with the 20-year a few weeks ago, there will be heightened interest, especially for the 30-year,” said Kevin Flanagan, head of fixed-income strategy at WisdomTree.
Data on Wednesday showed underlying U.S. inflation rose less than expected in May. The data spurred gains in Treasury prices, which are dominated by shorter-dated bonds, as traders increased bets that the Federal Reserve will cut interest rates this year. Strong buying at an auction of 10-year Treasury notes also helped boost Treasury prices.
However, inflation remains above the Fed’s 2% target, and policymakers have signaled they are waiting to see how much tariffs will boost consumer inflation before cutting rates further. Long-dated bonds are particularly vulnerable to a resurgence in price pressures.
Leaving
Faced with all these risks, bond managers including DoubleLine Capital and Pacific Investment Management Co are favoring Treasurys with maturities of 10 years or less while reducing allocations to longer-dated bonds.
This week, Pimco reiterated that it will remain underweight long-term bonds for the next five years, while DoubleLine’s Jeffrey Gundlach said long-term U.S. Treasuries are no longer considered a legitimate risk-free investment.
Ahead of Thursday’s auction, 30-year bonds were yielding about 4.9%, $3 billion less than the May auction. Thursday’s auction was a reopening, with 30-year bonds yielding $3 billion less than the May auction. That’s more than half a percentage point above the lows of early April, when U.S. tariffs began to roil markets.
Since peaking in May, yields have stabilized in the 5% range, suggesting that 5% is attracting buyers, and that level is seen as a ceiling before the auction.
“The 5% threshold does attract investor demand,” Gregory Peters, co-chief investment officer of PGIM’s fixed income division, told Bloomberg TV.
“I think long-term bonds are going to trade at low prices for quite some time,” he said. “The point is that there is so much debt that needs to be refinanced and financed, not counting the additional debt from the upcoming tax bill that Congress is considering.”
Notably, U.S. tariffs brought in record revenue in May, helping to narrow the federal budget gap that month.
Reasons to buy
Guneet Dhingra, head of U.S. rates strategy at BNP Paribas, sees a case for buying 30-year bonds at current levels, as he believes they already reflect the deteriorating fiscal situation and could rebound on strong auction demand or easing deficit concerns.
There is also the network of primary dealers who must bid at the auction, which would be supportive if investors shy away on Thursday.
The focus will be on demand indicators for the auction, as well as its net yield relative to the pre-auction bidding deadline. A breakdown of domestic and foreign buyers will be released later this month.
“There’s a lot of debt coming down the road, so we’re watching the auction statistics closely for signs of people leaving,” said David Hoag, fixed-income portfolio manager at Capital Group.
“We’re watching closely because one of the mechanisms by which periodic premiums rise is if non-U.S. buyers start to exit this market — or not even exit, but stop and slow their buying trajectory.”
