U.S. set to pay most for 30-year debt in quarter of a century

The United States government is set to sell 30-year bonds at the highest interest rate in nearly a quarter of a century, amid a historic selloff that has sparked speculation about a shift toward short-term borrowing. The Treasury plans to offer $25 billion in 30-year debt at its auction later on Thursday. The bond's projected yield stands at around 5.23%, making it the priciest borrowing cost since 2001.

This predicament presents challenges for President Donald Trump and Treasury Secretary Scott Bessent as they enter the midterm elections in November. Elevated government financing costs have already trickled down to the broader economy, following years of elevated inflation and increased government spending. Concerns about the sustained high yields were evident last week when the Treasury modified its debt-sales guidance, hinting at potential cuts to long bond supply.

Despite this, investors have not flocked to secure multi-decade high yields, indicating a level of caution that the selloff may not be over just yet. John Fath, a managing partner at BTG Pactual Asset Management US LLC, noted that investors are not overly eager to buy the 30-year bonds, and this should serve as a cautionary signal.

Bessent may attempt to mitigate the situation by reducing supply, but the sheer volume of existing 30-year bonds makes it unclear if new issuance alone is driving price movements. The surge in long-term yields has been propelled by concerns over a rise in energy prices, which could keep inflationary pressures high and force the Federal Reserve to maintain elevated interest rates for an extended period.

In addition to these factors, there has been a surge in corporate borrowing to fuel the artificial-intelligence boom and a waning demand from traditional long-dated bond buyers. On Thursday, yields across maturities dipped by two to three basis points as a US producer price report suggested easing inflationary pressures. Traders tempered their expectations for a Federal Reserve rate hike in September, projecting about a 35% probability, down from roughly 50% earlier in the week.

The public debt's interest payments continue to be a significant contributor to the nation's budget deficit. For the fiscal year to date, the total stands at $1.17 trillion — a 15% increase, partly due to the higher yields on Treasuries. On Wednesday, a 10-year bond auction fetched the highest yield for that maturity since 2007.

The team at Allspring Global Investments anticipates that today's 30-year auction will proceed smoothly, but they caution against interpreting a successful auction as a sign of robust structural demand for long-duration assets. If prices hold around the current levels during the scheduled 1 p.m. New York auction, it would mark the highest borrowing rate since the Treasury eliminated the long bond in 2001.

This scenario is starkly different from when the decision was made, as bond investors profited from a multi-decade bull market, and budget surpluses fueled concerns about insufficient US government debt supply. Currently, the outstanding Treasuries are ten times larger and have nearly doubled since 2018, reaching approximately $31 trillion.

As traditional demand sources have shifted away from Treasuries, private market participants have stepped in, demanding higher yields. Barclays Plc's Demi Hu highlighted that as the market becomes increasingly dependent on price-sensitive investors, a fixed amount of Treasury supply may necessitate a larger yield concession to be absorbed.

The Treasury's decision to adjust its quarterly borrowing policy to consider potential "changes" in coupon and floating-rate note sales raised concerns among bond investors. While a potential reduction in long bond sales is not out of the question, the market expects that when the Treasury does increase its fixed-income auctions, it will likely focus on shorter-term notes maturing within two to seven years.

This strategy of prioritizing shorter maturities could help sidestep higher yields on longer tenors but may increase refinancing risks. Fath suggested that the only clear solution to reduce long-term borrowing costs is for the US government to tighten its budget. Closing down issuance on the longer end may become impractical, leading to irresponsible financial practices.