How the long-term Treasury debt grows: Treasury notes & bonds outstanding rose on net by $59 billion this week.

By Wolf Richter for WOLF STREET.

The US government sold $646 billion of Treasury securities during the week, spread over 10 auctions. Of these auction sales, $527 billion were Treasury bills, spread over seven auctions, with maturities from 4 weeks to 52 weeks, most or all of them to replace maturing T-bills; and $119 billion were 3-year and 10-year Treasury notes and 30-year Treasury bonds. That $119 billion in issuance replaced $60 billion of maturing notes, and no bonds matured, causing the total amount of notes and bonds outstanding to increase on net by $59 billion this week.

This was also the week two big inflation reports were released, showing that consumer price inflation had accelerated to 4.25% in May, and that producer price inflation had accelerated to 6.46%, which, along with another Iran-deal announcement on Thursday, created some special dynamics for long-term yields.

But Treasury yields of 1 year and shorter are not impacted by inflation. They’re boxed in by the Fed’s policy rates and by market expectations of those policy rates within their remaining maturity window.

In the secondary market, the short-term yields, after edging up in prior weeks, were roughly unchanged this week, all them across the board now substantially below the rates of inflation – so negative “real” yields. And they continued to point at a rate hike late this year.

These are the seven T-bill auctions this week, amounting to $527 billion:

Type	Auction date	Billion $	High Rate	Investment Rate
Bills 4-week	Jun-11	75	3.595%	3.665%
Bills 6-week	Jun-09	69	3.600%	3.665%
Bills 8-week	Jun-11	80	3.610%	3.681%
Bills 13-week	Jun-08	95	3.640%	3.725%
Bills 17-week	Jun-10	74	3.665%	3.761%
Bills 26-week	Jun-08	82	3.690%	3.812%
Bills 52-week	Jun-09	53	3.750%	3.914%
Bills		527

“High rate” and “Investment Rate” are the two different calculations of the yield that the Treasury Department provides with its T-bill auction results. T-bills are sold at a discount, and at maturity, the holder gets paid face value; the difference is the interest. There are no coupon interest payments. The “high rate” reflects the yield calculation of that process.

To make this discount yield comparable to the yields of coupon securities (2-year to 30-year), the Treasury Department re-calculates it as “investment rate,” which is higher than the “high rate.” And around the time of the auction, the “investment rate” is close to the “constant maturity yield” published by index providers to reflect trades in the secondary market for that type of remaining maturity.

The 26-week (6-month) Treasury bills sold at auction last Monday came with a high rate of 3.69% and an investment rate of 3.812%. In the secondary market at around the time of the auction on Monday, the 6-month “constant maturity yield” was 3.805%.

It points at a rate hike late this year. In the secondary market, the 6-month yield closed on Friday at 3.80%. It has been well above the Effective Federal Funds Rate (EFFR, now at 3.62%, dotted blue line), which the Fed targets with its policy rates. This is an indication that the market has assigned a substantial chance of a rate hike within the 5-month or so predictive window of the 6-month yield.

How the debt increased this week:

The Treasury Department sold $119 billion of notes and bonds at three auctions this week.

Notes & Bonds	Auction date	Billion $	Auction yield
Notes 3-year	Jun-09	58	4.192%
Notes 10-year	Jun-10	39	4.538%
Bonds 30-year	Jun-11	22	5.020%
Notes & bonds		119

But only $60 billion of securities of these maturities matured, and the amount of Treasury notes and bonds outstanding rose by $59 billion this week:

The $58 billion of 3-year notes that sold at the auction on Tuesday at 4.192% replaced $40 billion in 3-year notes sold at auction in June 2023 at 4.202%, that mature on Monday. So with this week’s auction, the total amount of 3-year notes outstanding rose by $18 billion ($58 billion new notes replacing $40 billion of maturing notes).

The $39 billion of 10-year notes that sold at the auction on Wednesday at 4.538% replaced $20 billion in 10-year notes sold at auction in June 2016 at 1.702%, that mature on Monday. So with this week’s auction, the total amount of 10-year notes outstanding rose by $19 billion.

The $22 billion of 30-year bonds that sold at the auction on Thursday at 5.020% replaced no maturing 30-year bonds because in 1996, 30-year bonds were issued only twice a year, in February and August. Now they’re issued every month.  And the entire $22 billion sold this week added to the outstanding balance of 30-year bonds.

New issues being now so much larger than the maturing issues they replace, and new issues not replacing any maturing issues — such as the 30-year bond this week, or all 20-years bonds which started being issued in 2020, and none mature for another 14 years — are among the dynamics by which the total pile of Treasury notes (2-year to 10-year) and Treasury bonds (20-year and 30-year) increases constantly, even as the Treasury Department said, to calm the bond market’s supply fears, that it is not further increasing the auction sizes for notes and bonds this quarter.

Long-term Treasuries face inflation fears, but not this week.

The inflation reports this week didn’t frazzle the Treasury market too much perhaps because something like that had been expected, and there’s still the widespread hope that this inflation was only triggered by energy prices, and that these energy prices are bound to come down when some kind of deal is reached between the US and Iran.

The bond market thereby ignored inflation in non-housing services, which has accelerated for the past six months and in May shot up by the most since March 2024, and the continual surge of electricity costs driven by the demand from AI data centers that is unrelated to the price of crude oil.

And the long end of the Treasury market then got another hopeful announcement about a deal with Iran on Thursday, June 11, which caused long-term yields to drop sharply in the secondary market, only to bounce back part of the way on Friday.

But the $119 billion of Treasury note and bond auctions had already taken place by the time of the Iran announcement on Thursday afternoon, and so they sold at the auction at higher yields than where the secondary market closed on Friday.

The 3-year Treasury notes that sold at auction at a yield of 4.192% paralleled trading in the secondary market at the time. Two days later, after the stuff about a deal with Iran came out, the yield in the secondary market fell by 10 basis points, to 4.09% by early Friday, but then bounced back some, and on Friday closed at 4.14%.

This yield is now 52 basis points above the EFFR, signaling that the bond market expects multiple rate hikes during the front part of the three years.

And at 4.14%, the yield is below CPI inflation of 4.25%, and so the “real” yield of these 3-year notes is now negative, and were purchased at the auction at a negative real yield.

The 10-year Treasury notes that sold at auction at a yield of 4.538% came with coupon interest of 4.375%, and so they were sold at a discounted price of $98.70 for each $100 of securities, for this coupon interest rate to turn into a yield of 4.538% on the purchase price. At maturity, holders get paid the full $100.

The next day in the secondary market, the yield dropped by 10 basis points from the moment of the Iran announcement to Friday in overnight trading, to 4.44%. It then bounced off, and closed on Friday at 4.49%, roughly 5 basis points below the auction yield. For the week, the yield declined by 6 basis points.

Lower yields of long-term debt mean higher prices for holders of existing securities. Note how the long-term bond market has completely blown off the Fed’s rate cuts.

CPI inflation at 4.25% in May has approached in leaps and bounds the 10-year Treasury yield (4.49%), and so the “real” 10-year Treasury yield (yield minus inflation) is on the verge of turning negative, which is a very unattractive place to be.

For long-term debt, inflation can be brutal if the yield is too low to compensate the holder for the loss of purchasing power plus some. And given the Fed’s reluctance and slowness to deal with inflation, and given current and future governments’ eagerness to let the economy “run hot” in order to deal with the otherwise unsustainable fiscal mess, inflation isn’t going back into the bottle. It will be allowed to percolate through the economy for years to come. And the bond market will have to live with it.

It’s higher yields that allow the bond market to live with higher inflation.

The 30-year Treasury yield has been zigzagging around the 5% line since early April. On Friday, it closed at 4.97%. A week earlier, it closed at 5.01%.

My imaginary trendline that connects some of the lows still holds: a five-year trend of higher lows, while the yield-yo-yo has been narrowing as the bond market appears to be getting less uncertain about the trend.

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