Ok, so I don’t want to spend a ton of time on this because, frankly, it’s so self-evident that I’m not sure it needs a lengthy treatment.
Wednesday’s “bigly” tailing auction of 30Y paper was a disaster – maybe you heard. The bid/cover was the lowest since 2009, primary dealers were forced to take down 38.1%, the most since 2015 and, in keeping with recent dubious precedent, direct bidders were allotted just 2.9%, another “since 2009” listless nadir, and down from 12.8% in the previous 30-year sale.
This got a lot of attention on Wednesday, which is fine because anytime you can cram “since 2009” into the same title with “Treasury demand”, you’ve got a real winner of a headline in terms of reader interest.
What you want to keep in mind as you read the post-mortems of that debacle is that this is hardly a shocker. One outlet of normally ill-repute correctly put the word “surprise” in scare quotes in the course of documenting the absence of direct bidders on the way to eschewing the normal hyperbole in favor of an appropriately succinct explanation, which is simply that nobody wants this damn paper because the U.S. is on a truly “deplorable” fiscal trajectory and it’s not entirely clear why anybody would be comfortable financing that insanity without extracting an arm and leg in terms of compensation (i.e., higher yields).
That’s pretty much all there is to this discussion and while the direct bid collapse (shown below for 3s, 5s and 7s) is still shrouded in a bit of “mystery”, there isn’t anything that’s “mysterious” about the overarching narrative, which is that even if Steve Mnuchin does continue to find buyers for the deluge of supply necessitated by Trump’s fiscal largesse (this week’s 10Y auction was generally fine), there will be days when things don’t go as planned, and Wednesday was one of those days.
Anyway, what you want to keep in mind about this is that it raises serious questions about fiscal breathing room. Simply put: Going on a borrowing binge this late in the cycle in the interest of funding tax cuts for corporations and billionaires, means that when the country wants to do something that has some actual merit – like, say, fund infrastructure development – Treasury’s ability to finance that investment is going to be hamstrung.
Now cue this, from Reuters out Wednesday evening:
The incoming head of the U.S. House Transportation and Infrastructure Committee wants the White House to back significant additional federal funds to rebuild crumbling U.S. roads, bridges and airports.
Representative Peter DeFazio, who is set to become head of the House of Representatives committee overseeing transportation after the Democrats take control of the chamber in January, previously proposed $500 billion in funding by issuing 30-year bonds and using revenue from indexing fuel taxes to rise with inflation. He told reporters on Wednesday he would be seeking significant funding.
Forget the gas tax hike for a minute and just think about everything said above. A lot of folks believe that one of the best opportunities for compromise between Donald Trump and a Democratic House is infrastructure. Trump said as much on Wednesday during his otherwise insane press conference:
The Democrats will come to us with a plan for infrastructure, a plan for healthcare, a plan for whatever they’re looking at and we’ll negotiate. We have a lot of things in common on infrastructure.
That’s great – except that thanks in part to all the debt issued to pay for the tax cuts (which, again, disproportionately benefited corporations and the wealthy), demand for the debt the U.S. would need to issue to make investments in things like roads and bridges isn’t there.
So if you’re wondering whether Peter DeFazio’s plan to issue a bunch of 30Y bonds to help make sure the bridge you’re driving over doesn’t collapse into the waterway it traverses is viable, the answer, according to Wednesday’s auction, is “probably not”.
And all so people who generally eschew bridges and roads for private jets can pay less in taxes.
How does that make you feel?