All of the volatility we’ve been seeing this week hasn’t only played out in stock markets. Bond markets have been all over the place, too, as we've been reporting.
Bond investors have been trying to figure out how much money to pour into the safety of U.S. government bonds and whether those bonds are actually all that safe anymore.
Meanwhile, the Treasury Department has been holding auctions to sell new government bonds to investors, as it often does.
Treasury auctions aren’t exactly like the auctions you’ve seen in the movies. There’s no fast-talking auctioneer and bidders don’t hold up paddles.
“People enter bids, and then they find a price,” said Laura Veldkamp, a finance professor at Columbia University.
She said buyers aren’t actually bidding how much they’ll pay to buy the bond: “What they’re actually bidding are yields. Yields are like interest rates. And so what they’re saying is I’ll buy that bond, if you pay me this much interest.”
When Treasury auctions go well, Veldkamp said, “it means that all of the bonds that the U.S. government wanted to get sold, that somebody actually showed up and bought them. And that they bought them at a price that was roughly what we expected the price to be.”
But Treasury auctions don’t always go that smoothly. For instance, on Tuesday the Treasury Department held an auction of three-year notes.
“The auction was objectively horrible,” said Lawrence Gillum, chief fixed-income strategist at LPL Financial.
Potential buyers were spooked by the Donald Trump administration’s aggressive tariff policy, so demand for those three-year Treasuries was weaker than expected.
“So Treasury had to pay up a little bit to help entice demand,” Gillum said. In other words, it had to offer a slightly higher interest rate.
The Treasury Department also held auctions for 10- and 30-year debt this week, and Gillum said those went a lot more smoothly.
But he said that weak auction Tuesday has investors paying much closer attention to the level of demand for Treasuries.
“If we see a string of auctions that don’t go well, that would be a big clue that investors are potentially looking elsewhere,” he said.
That would tell us that investors no longer think government bonds are such a safe investment.
