Wall Street "warns" Trump! Two-year US Treasury auction "unusually dismal," market approaching a "turning point"
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The US-Iran conflict continues to escalate, and Wall Street is sending the market its most direct warning—the US Treasury auction is lukewarm.
On Tuesday, March 24, the US Treasury’s $69 billion two-year bond auction saw weak demand, far below expectations, with foreign investors almost completely absent.
The final two-year US Treasury bond was sold at a yield of 3.936%, higher than the pre-auction secondary market’s immediate yield levels, creating the largest auction tail since March 2023, highlighting weak market appetite to buy.
In addition, CCTV reported that parts of the US Army’s 82nd Airborne Division are about to deploy to the Middle East. These dual factors pushed the two-year US Treasury yield up by as much as 10 basis points to 3.96%, a nearly eight-month high, briefly lifting yields across all maturities.
TJM Institutional Services interest rate strategist David Robin attributed the auction result to an extremely uncertain market environment:
Unfortunately, today’s auction came during a very tough, volatile, and unknown time. Why enter the market now? The risk-reward ratio is seriously tilted toward risk.
Notably, after US markets closed Tuesday, according to CCTV News, Trump stated that US-Iran negotiations are “possibly quite close to reaching a deal,” and Iran agreed never to possess nuclear weapons. The report added that the US is willing to offer a one-month ceasefire and 15 peace proposals.
US Treasury yields briefly pulled back, erasing part of the day's gains, and oil prices also fell in after-hours trading. However, this hasn’t fundamentally changed the market’s cautious tone. There is a $70 billion five-year Treasury auction this Wednesday and a $44 billion seven-year Treasury auction on Thursday yet to be absorbed.
Oil Prices Drive Inflation Concerns, Rate Cut Expectations Completely Reversed
This auction result marked the highest yield for a two-year bond auction since May, while just one month ago, the two-year auction held on February 24 resulted in the lowest yield since 2022.
Ultimately, ongoing Middle East conflicts are keeping oil prices high, fueling renewed inflation expectations and nearly killing off hopes for a Fed rate cut this year; the market is even pricing in the possibility of a hike.
John Canavan, chief analyst at Oxford Economics, pointed out:
High oil prices are keeping the market pricing in a small chance of a Fed rate hike this year. Uncertainty is also temporarily sidelining potential auction buyers.
He also said:
US Treasuries selling off is in part an instinctive response to a bad auction, but weak auction demand itself is also partly because of high oil prices.
Ameriprise chief market strategist Anthony Saglimbene said:
High oil prices are putting real pressure on the US economy through rising prices and declining employment. Until there are clearer signals from the Middle East, especially in the Strait of Hormuz, stocks will stay under pressure.
Rising US Treasury yields across the board also mean higher borrowing costs and tighter financial conditions, which directly drag on both companies and consumers. About $10 trillion of US domestic debt is expected to mature and need refinancing over the coming year, and the pressure from higher borrowing costs should not be underestimated.
The two-year Treasury is often the benchmark most sensitive to market expectations for monetary policy and is supposed to attract safe-haven flows during Fed rate cut cycles. Yet with yields rising and auction demand shrinking, this shows investors are changing their outlook on future policy.
As Anthony Saglimbene put it:
The market is starting to doubt that things will be easily resolved.
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