Treasuries and AI Compete for Global Capital

SPEAKER_1 (0:00)

It's time to spotlight fixed income and the impact elevated yields are having across equities, private credit and more. Joining us now is Thomas Urano, the co-CIO and managing partner at Sage Advisory. Thomas, great to have you on this show.

The treasury just sold $39 billion of tenure notes at a 5.3% yield. That was the highest auction yield we've seen since November of 2000 I'd love to start with your takeaways here and what the auction told you about investor demand for treasuries right now.

Thomas Urano (0:30)

Yeah, great. There's been a lot of anxiety about the treasury market and supply and who's going to take our bonds. But I would say yesterday's 10-year auction was a resounding success. We stopped about 1.7 bips through. There was a 277 bid to cover. That's better than recent averages. Importantly, indirect bidders, including foreign demand, they made up for almost 80 percent of the issuance. That was well above recent averages and dealers were left with a very small sliver. The bottom line is the auction was great, strong bid to cover, exceptional demand. It was certainly a clear positive for the treasury market.

I think what it also tells us is that investors aren't simply just rejecting treasuries. I know yields have been drifting higher and it's put a little bit of anxiety in the market, but given the details of this auction, it's suggested large buyers, foreign institutions, central banks, pension funds, other investors, they're beginning to see value.

Then today is, I think, another big hurdle. We have a 30-year bond auction today. As that goes off, we want to see if long-duration demand remains strong, suggesting yields above 5 percent may be attracting buyers. Hopefully, that would stabilize this market.

SPEAKER_1 (1:36)

You mentioned that the foreign investor demand was more than 80 percent. It left only about dealers, about two and a half percent. You called it a sliver there. How important is that international demand at a time when the market is really questioning whether international investors are going to continue financing the US at these current levels?

Thomas Urano (1:55)

Yeah, so I think it's a great signal.

The big question mark has been on foreign demand for US treasuries, specifically Japan. How is Japan doing? Is China involved in the treasury market? I think their apprehension or maybe if these foreign central banks or foreign sovereigns step away as participants, not just in the treasury market, but in overall sovereign markets, it creates some yield volatility and we're seeing that right now in Europe. France is leading the way with some fiscal issues over there, but broadly speaking, European solves those yields are on the rise too and again, if those are markets where foreign participants are stepping back, it causes a headwind and it's one of the factors that's driving yields up.

SPEAKER_1 (2:40)

Thomas, after the auction, we actually saw the 10-year fall back below 5.3 percent, but I've had many conversations with strategists who are forecasting the potential for a 10-year and a 30-year that's reaching 6 percent. After the strong auction we had yesterday, and of course we haven't had the 30-year yet today, does that still look like a realistic risk to you?

Thomas Urano (3:03)

A move above 6 is certainly possible given the volatility, the degree of rate moves that we've seen in this market over the last weeks or months. That level of volatility, a move, a quick move, another 20 basis point move is possible. But looking at charts and looking at the recent patterns over the last few days, we look like we're in maybe the early phase of potentially building some consolidation around these levels on 10s here.

Optimistically, we can see how that unfolds, but it's a big wild card in terms of supply and demand dynamics. I think one of the other factors that's at play here is the amount of capital competition that you're seeing from private sector and that's another issue. I think people tend to think about inflation, growth, fiscal issues, but we have to acknowledge what's happening in terms of private sector borrowing too.

SPEAKER_1 (3:55)

Let's dive into that because you say that that's a force that's really pushing things higher, that's being underappreciated right now, this enormous borrowing to fund the infrastructure build out. How significant is this, Thomas? I mean, are we looking at the government and the private sector effectively competing for the same pool of capital here?

Thomas Urano (4:14)

Oh, I think absolutely. This is probably one of the more interesting things and call it underappreciated themes that's happening today, is while at the same time that the government is running tremendous budget deficits that need financing in the form of treasury supply, the private sector is in this massive AI investment cycle, and that's requiring huge demands for capital, and we've seen tremendous issuance out of the private sector, and these are two large forces that are effectively competing for the same pool of global savings, right? So there is a competition here for capital, and those numbers are pretty staggering when you think about what the drivers are and the total supply that's hitting the market, particularly in the long end.