As the U.S. government kicks off its debt sales this year, here's one potentially worrisome sign for traders to keep in mind: the steep decline in demand at its bond auctions.
Of the $2.4 trillion of notes and bonds the Treasury Department offered last year, investors submitted bids for just 2.6 times that amount, data compiled by Bloomberg show. That's less than any year since 2008. The bid-to-cover ratio, as it's known, fell even as benchmark Treasury yields soared to multiyear highs in October, before falling back to their lows last month.
Granted, it's not as if the U.S. will have trouble borrowing as much as it needs. And there's little in the data to suggest weak auctions lead to bond losses. Yet the drop-off is an early warning that demand for Treasuries may not keep up as the U.S. goes deeper into the red. Debt supply jumped in 2018 largely because of the Trump administration's tax cuts. Forecasts show the deficit could soon swell past a trillion dollars and stay that way for years to come.
The weakness "doesn't matter until it suddenly does," says Torsten Slok, Deutsche Bank's chief international economist. "A declining bid-to-cover ratio increases the vulnerability and probability that investors suddenly will begin to think that a falling bid-to-cover ratio is important. Put differently, all fiscal crises begin with a declining bid-to-cover ratio."
The first note auctions of 2019 didn't do much to stamp out those worries. On Tuesday, demand at the Treasury's $38 billion sale of 3-year notes fell to a near-decade low. The bid-to-cover ratio for Wednesday's $24 billion auction of 10-year notes, which ended the day yielding 2.71%, was 2.51, in line with last year's average for the maturity.