As AI & chip stocks tanked, investors shifted from the “AI trade” to the “safe-haven trade” and bid up Treasuries.
By Wolf Richter for WOLF STREET.
The US government sold $907 billion of Treasury securities this week, spread over 11 auctions. That’s a big pile of paper that went through the auctions. $1 Trillion here we come.
Of them, $670 billion were Treasury bills with maturities from 4 weeks to 52 weeks, spread over seven auctions. And $237 billion were Treasury notes across four auctions.
T-bill yields eased across the board this week. They largely reflect the Fed’s policy rates (no rate-hike meeting) and market expectations of the Fed’s future policy rates. They can also reflect big shifts in demand. There was some of that, as the market shifted from the “AI trade” to the “safe-haven trade” with AI and chip stocks tanking left and right – oh poor Intel.
| Treasury bill auctions this week: | ||||
| Type | Auction date | Billion $ | High Rate | Investment Rate |
| Bills 4-week | Oct-29 | 121 | 3.910% | 3.976% |
| Bills 6-week | Oct-27 | 103 | 3.950% | 4.023% |
| Bills 8-week | Oct-29 | 116 | 4.020% | 4.100% |
| Bills 13-week | Oct-26 | 103 | 4.050% | 4.149% |
| Bills 17-week | Oct-28 | 79 | 4.140% | 4.256% |
| Bills 26-week | Oct-26 | 89 | 4.210% | 4.361% |
| Bills 52-week | Oct-27 | 59 | 4.290% | 4.496% |
| Total T-bills | 670 | |||
Most of these huge T-bill sales replaced maturing T-bills as T-bills are short-term in nature and need to be rolled over all the time. But not all.
And the pile of T-bills outstanding has been ballooning, from $2.5 trillion at the beginning of 2020 to $7.12 trillion at the end of September (end of October data is not yet available).
Since January 2025, the beginning of Bessent’s reign at Treasury, the amount of T-bills outstanding has increased by $930 billion.
But not yet Bessent’s shift to T-bill issuance. All marketable securities outstanding also soared over the same period, and the share of T-bills has been roughly centered around 22% of total marketable securities since the beginning of 2024. So Bessent’s much heralded shift of debt issuance from notes and bonds to T-bills has not yet taken effect.
A share of 22% for T-bills is considered high. A high share of T-bills can blow out the US government’s interest payments during inflationary times when the Fed hikes its policy rates, and substantially worsen the deficit. All T-bills turn over in less than a year, and when new issues at the new higher rates are sold to replace maturing issues with lower rates, rate hikes translate quickly into higher interest payments.
In addition, as T-bills mature all the time and need to be refinanced all the time, shifting even more issuance to T-bills will cause T-bill auctions to balloon to grotesque proportions.
Over the last two years of Yellen’s reign at Treasury, issuance had already shifted to T-bills, and their share rose from 16% in early 2023 to 22% by early 2024 and stayed there. Bessent has been sticking to Yellen’s script. Maybe the primary dealers cautioned him to not overplay his hand in this shift to T-bills.
The $89 billion of 26-week T-bills were sold at the auction on Monday at a “high rate” of 4.210% or at an “investment rate” of 4.361%.
In the secondary market, the 6-month Treasury yield ended the week at 4.275%, 37 basis points above the Effective Federal Funds Rate (EFFR, dotted blue, 3.88%), which the Fed targets with its policy rates.
This 37-basis point spread indicates the Treasury market expects at least one rate hike within the window of 6-month maturities. The 6-month yield has a decent record of predicting changes of the Fed’s policy rates several months ahead of time.
It does fumble around a bit, now that Warsh has declared war on “forward guidance,” and markets are left to their own devices, which promises to generate more volatility. In this rate-hike cycle, the 6-month yield traded as high as 4.41% on September 28.
The government sold $237 billion of Treasury notes this week, spread over four auctions, including two 2-year auctions: one for the regular 2-year note with a fixed coupon payment, and one for the 2-year Floating Rate Note (FRN).
The 2-year FRNs were sold at a “spread” of 0.038%. Holders get an interest rate that resets every week, based on the yield at which the most recent 13-week T-bills were sold at auction, plus the spread of 0.038% (discount margin). For the current week, the yield is 4.088% (13-week T-bill “high rate of 4.05%, see above, plus the spread of 0.038%). The yield of this 2-year note changes every week with the yield of the 13-week T-bill auctions.
Yields have dropped in recent weeks, and the auction yields of those notes this week were lower across the board than at their auctions a month ago.
| Treasury note auctions this week: | |||
| Notes | Auction date | Billion $ | Auction yield |
| FRN 2-year | Oct-28 | 33 | spr 0.038% |
| Notes 2-year | Oct-26 | 77 | 4.708% |
| Notes 5-year | Oct-27 | 78 | 4.845% |
| Notes 7-year | Oct-29 | 49 | 4.894% |
| Total notes | 237 | ||
The $77 billion of 2-year Treasury notes were sold at a “high yield” of 4.708%, down by 8 basis points from the auction a month ago (4.787%).
In the secondary market, the 2-year Treasury yield ended the week at 4.56%, having dropped by 14 basis point since the auction on Monday.
Two factors could have been in play: The market dialed back rate-hike expectations and, as AI and chip stocks tanked, shifted from the “AI trade” to the “safe-haven trade,” which caused investors to bid up prices of longer-term Treasury maturities, which caused their yields to drop.
Despite the substantial reversal of the 2-year yield, it’s still 68 basis points above the EFFR, indicating that the market still expects some rate hikes in its window.
The 10-year Treasury yield eased by 6 basis points during the week and ended the week at 4.94%, down by 37 basis points from the closing high on October 5 of 5.31%.
The long-term chart shows just how volatile the 10-year yield is. It had surged from 4.0% to 5.31%, or by 131 basis points, in less than eight months. That’s a lot. But that kind of yield surge is not uncommon, and typically a big yield surge (bond sell-off) is followed by a yield pull-back (bond rally).
For this observer (and buyer at the 10-year auction on October 7), the 10-year yield is now back in the range where it is no longer attractive to this observer. So no, someone else can buy them.
It is of course possible that this is as good as the yield is going to get over the next few years, and that it’ll zigzag down further from here.
But that’s not what I see. Rather, I consider this a technical pullback after a spike, and I expect the yield to eventually work its way higher, once again driven by fundamentals: Inflation that refuses to go back into the bottle, $2.2 trillion a year of new supply of Treasury debt that investors have to be induced to buy, and competition from corporate debt issuance that comes with much higher yields (and risks), especially in the AI sector.
It seems to me that over time those fundamentals would create enough upward pressure to push the 10-year yield substantially over the 5%-line.
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