Lots of new supply: Treasury debt of notes and bonds outstanding ballooned by $70 billion this week.

By Wolf Richter for WOLF STREET.

The US government sold $743 billion of Treasury securities during the week, in 10 auctions. Of them, $612 billion were Treasury bills, spread over seven massive auctions, with maturities from 4 weeks to 52 weeks, most of them to replace maturing T-bills. And $131 billion were 3-year and 10-year Treasury notes and 30-year Treasury bonds, which replaced $61 billion of maturing securities, causing the total amount of notes and bonds outstanding to balloon by $70 billion this week.

There was strong demand at the auctions, but at higher yields. T-bill yields have begun to factor in rate hikes. The 6-month T-bills sold at an investment rate of 3.96%. The 1-year T-bills sold at an investment rate of 4.03%, for the first time over 4% since the auction on July 8, 2025, and that was three rate-cuts ago. The 10-year Treasury notes at a yield of 4.58%, highest auction yield since February 2025. The 30-year Treasury bond sold at a yield of 5.058%, the highest auction yield since 2007.

Inflation has been running at a rate of over 4%, so all those T-bill yields, though they have risen in recent months, are below the rate of inflation, and “real” (after inflation) returns are negative. But Treasury yields of 1 year and shorter are not impacted by inflation, but by the Fed’s policy rates and by market expectations of those policy rates within the remaining maturity window of those yields. And the Treasury market is now solidly in the camp of rate hikes, starting with at least one this year. If Fed Chair Warsh wants to talk the Treasury market down from those rate-hike expectations, he needs to start scrambling pronto:

Treasury bill auctions this week:
Type	Auction date	Billion $	High Rate	Investment Rate
Bills 4-week	Jul-09	106	3.630%	3.691%
Bills 6-week	Jul-07	95	3.635%	3.701%
Bills 8-week	Jul-09	101	3.635%	3.706%
Bills 13-week	Jul-06	97	3.735%	3.823%
Bills 17-week	Jul-08	76	3.790%	3.891%
Bills 26-week	Jul-06	83	3.830%	3.960%
Bills 52-week	Jul-07	53	3.860%	4.032%
Total T-bills		612

The 1-year T-bill sold at an investment rate of 4.032% at the auction on Tuesday. In the secondary market, the 1-year yield then edged up to 4.06% and closed on Friday at 4.06%, the highest since July 30, 2025, three rate cuts ago.

The 1-year yield in the secondary market is now 44 basis points above the Effective Federal Funds Rate (EFFR, blue), which the Fed targets with its policy rates, indicating that the Treasury market is solidly in the camp of a coming rate-hike cycle, given the inflation data this year.

Even banks are pricing rate hikes into their CD offerings. They have been raising the interest rates they offer on “brokered CDs” they sell via stock brokers to retail investors. At my broker, even the yields offered on 1-month CDs are now over 4%, while 1-year CDs are offered at 4.15%, 2-year CDs at 4.25%, and 5-year CDs at 4.40%.

These are the highest brokered CD yields I’ve observed in a while; they confirm that banks expect rate hikes, and they want to lock in deposits at these rates before rates rise even further.

Long-term yields pushed up by fears of new supply & inflation.

The Treasury Department sold $131 billion of notes and bonds at three auctions this week.

Treasury note and bond auctions this week:
Notes & Bonds	Auction date	Billion $	Auction yield
Notes 3-year	Jul-07	64	4.179%
Notes 10-year	Jul-08	43	4.580%
Bonds 30-year	Jul-09	24	5.058%
Notes & bonds		131

The 30-year Treasury bonds sold at auction on Thursday with a yield of 5.058%, the highest auction yield since the 30-year auction in August 2007 (5.059%). There was lots of demand at this auction, but at that higher yield.

In the secondary market, the 30-year yield traded as high as 5.09% on Thursday in the hours before the auction, then settled down and closed on Friday at 5.06%.

It had traded higher than that three times in the last three years, including as high as 5.18% on May 19 this year. But the wild yield yo-yo in 2023 and 2024, with big spikes and plunges, has settled down, and instead, the yield has been leisurely ratcheting higher since last fall.

The two trend lines in the chart are for fun only: The dotted line depicts the calculated linear trend for the data in the chart. The double line is my imaginary trend line of higher lows since late 2023.

The long-term bond market completely blew off the Fed’s rate cuts.

The long-term bond market reacts to fears about inflation, about a lax Fed when inflation does take off, and about new supply that the market has to absorb, likely at a higher yield to create enough demand.

But by cutting rates even as inflation remained high in 2024, and by cutting rates again in late 2025 even as inflation had already begun to accelerate again, the Fed signaled to the bond market that it would it would be a lax Fed and give this inflation some room to run, that it would “look through” this inflation for a while, before trying to step in.

And now it’s July, all-items year-over-year CPI inflation is back over 4%, and the six-month core CPI – which, by excluding energy, shows the recent trend beyond the energy price spike – is also over 4%, and the Fed still hasn’t stepped in. That’s the definition of a lax Fed. And the bond market is starting to figure it out. And so the 30-year yield has ratcheted higher in part because of those rate cuts.

Higher yields of long-term debt mean lower bond prices for holders of existing securities. When yields rise a lot, it’s a bloodbath in bond land, and there was a lot of that in 2021-2023 as yields surged from near-0% to 5%. The massive losses on long-term bonds were one of the trigger points for the collapse of Silicon Valley Bank, which had held a lot of long-term securities it had bought with very low yields in 2020. But new buyers like the higher yields obviously.

The 10-year Treasury notes sold at auction on Wednesday at a yield of 4.58%, the highest auction yield since the auction in February 2025.

In the secondary market, the yield remained in that range and closed on Friday at 4.56%.

It’s higher yields that allow the bond market to live with higher inflation. But CPI inflation at 4.25% in May has closed in on the 10-year Treasury yield, and so the “real” 10-year Treasury yield (yield minus CPI) is just 31 basis points and can turn negative easily if inflation rises a little.

It’s this inflation combined with the lax Fed that still hasn’t stepped in though core inflation measures have been accelerating further away from its 2% target for an entire year, that render the 10-year notes at this yield very unattractive to this observer. But not to others, and there was lots of demand at the auction, and this difference in opinion is what makes a market:

The 3-year Treasury notes sold at auction at a yield of 4.179%. In the secondary market, the 3-year yield rose for the rest of the week and on Friday closed at 4.25%.

Since late February, the 3-year yield has surged by 86 basis points, and is now 63 basis points above the EFFR, signaling that the bond market has flipped solidly from a rate-cut scenario to a new rate-hike cycle.

In terms of the auction yield of 4.179%, it was below CPI inflation of 4.25%, and so these 3-year notes were sold at a negative “real” yield, signaling that the bond market thinks inflation will calm back down some over the next three years but not go back into its 2% bottle.

Treasury debt ballooned by $70 billion this week.

Of the $131 billion in Treasury notes and bonds sold this week, only $61 billion replaced maturing notes, and the remainder added $70 billion to the outstanding debt of notes and bonds (notes have terms of 2 to 10 years, bonds have terms of 20 and 30 years).

The $64 billion of 3-year notes that sold at the auction on Tuesday at 4.179% replaced $40 billion in 3-year notes that were sold at auction in July 2023 at 4.534%, and that mature next Wednesday (July 15). So with this week’s auction, the total amount of 3-year notes outstanding rose by $24 billion ($64 billion new notes replacing $40 billion of maturing notes).

The $43 billion of 10-year notes that sold at the auction on Wednesday at 4.58% replaced $21 billion in 10-year notes that were sold at auction in July 2016 at 1.516%, and that mature next Wednesday. So with this week’s auction, the total amount of 10-year notes outstanding rose by $22 billion.

The $24 billion of 30-year bonds that sold at the auction on Thursday at 5.058% 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 $24 billion sold this week added to the outstanding balance of 30-year bonds.

All combined, the three note and bond auctions this week added $70 billion in new debt.

New issues of notes and bonds being so much larger than the maturing issues they replace, and new issues not replacing any maturing issues at all, cause the pile of Treasury notes and bonds to increase constantly, even as the Treasury Department said soothingly that it would not further increase the auction sizes for notes and bonds this quarter.

This onslaught of new supply needs to find new demand – and that demand will materialize, but possibly only at higher yields — and lower prices for existing bondholders — and that’s one of the big fears that is pushing up long-term yields.

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