I’ve been paying attention to the weekly Treasury auctions over the past several weeks out of curiosity and in light of all the chatter about rising interest rates and inflation. Auctions basically represent insight into the incremental cost of capital for the U.S. government as the bills, notes and bonds being sold at auction are raising money to fund the government. In essence, they reflect the current yield investors are willing to accept to lend the government money. Presumably, if demand is soft yields will have to rise in order to attract sufficient buyers/lenders.
I haven’t really paid too much attention to who the buyers at these auctions are but one thing that has been very apparent is that each cohort of notes, bills or bonds is selling at higher yields than the previous auction. I’m not sure if the few weeks I have been casually tracking auction trends signifies anything meaningful, but, at the risk of exhibiting confirmation bias, the short-term trend certainly seems to confirm the rising rate narrative.
Rates have to go up at some point but I’m not sure they are going to move that quickly. The alarmists would have us all think they are going to blow sky high and, as a result, blow up our investment portfolios. I’m not sure what’s going to happen but as of right now it feels like shorter-term rates will likely continue to rise faster than longer-term rates, which are generally the rates that drive asset valuations. Furthermore, I’m not sure anyone really knows what threshold longer-term rates have to cross before asset valuations will actually be negatively impaired. I don’t think that threshold has been hit yet. So for now, I’m placing a higher probability on a fairly orderly rise in rates (to what level I have no idea) with minimal impact on asset valuations.