Gertrude Chavez-Dreyfuss, Ankur Banerjee and Harry Robertson

Persistently higher yields at US Treasury auctions are increasing the cost of refinancing debt and funding future deficits, as investors demand greater compensation to absorb Washington’s borrowing needs, raising questions about their appetite to continue buying US debt. Investors are concerned about the sheer volume of borrowing that must be financed in the years ahead, analysts said. US national debt is approaching a record $40 trillion, according to the Treasury Department, while the fiscal deficit remains large. “The overall market environment is definitely requiring Treasury to pay more to borrow,” said Zachary Griffiths, head of macro and investment-grade strategy at CreditSights in Charlotte, North Carolina.

“It is more of a problem longer run if we’re going to run budget deficits of 5% to 6% of GDP. Part of that is a fiscal and inflation risk premium, among other things.” Two Treasury auctions in the past week drew attention for their yields — the sale of 10-year notes cleared at a high yield of 4.683%, the highest in 19 years, while the 30-year bond auction stopped at 5.216%, a 25-year peak. Still, Treasury demand has held up even as yields have risen to multi-year highs. The same forces driving yields higher — namely inflation concerns, widening fiscal deficits and rising debt supply — are also boosting the compensation investors receive for holding US government debt. “The appetite for Treasuries is still there and it’s just a matter of — at what yield,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania. “The 10-year at close to 5% and the 30-year at multi-decade highs will attract more buyers for risk-free Treasuries.”

The Treasury Department did not respond to requests for comment.

Long-term Treasury yields have climbed this year as investors grappled with a combination of heavy borrowing, resilient economic growth, sticky inflation, and uncertainty over the pace of government borrowing. Investors, therefore, expect that a steady stream of Treasury issuance will compete for capital. Rather than financing a temporary funding gap, the government is increasingly viewed as facing structurally large deficits and borrowing needs. “We’ve seen a few trends that are worrying us,” said Laureline Renaud-Chatelain, fixed income strategy lead at Pictet Wealth Management, citing the increase in term premium driven in part by high fiscal deficits. The term premium refers to the extra compensation investors demand to hold longer-dated debt. Renaud-Chatelain said this situation would result in the Treasury continuing to skew its issuance of debt more to the short end of the yield curve. Growing deficits and higher interest payments have pushed US borrowing needs sharply higher, leading Treasury to increase the issuance of short-term debt that has been absorbed quickly by money market funds. The recent 30-year bond auction drew particular attention because long-dated Treasuries are especially sensitive to concerns about future inflation, fiscal sustainability and the supply of government debt. The auction’s outcome reflects “investor caution against long duration,” said Frances Cheung, head of FX and rates strategy at OCBC Bank in Singapore, referring to debt with higher maturities. The 10-year auction last week sent a similar signal. While the sale attracted solid participation from indirect bidders, a category that includes foreign central banks and institutional investors, the government still had to offer a yield near 4.7% to complete the offering.—Reuters