Board Game Drama at Thanksgiving, and US Treasury Auctions
You can learn a lot about people by playing board games.
Every Friday after Thanksgiving, my wife’s extended family (in-law and outlaws) plays The Really Nasty Horse Racing Game. Each person has a horse, there are six races with winning purses, and there’s a way to figure the odds for each horse in each race.
But that’s not the best part.
The delicious feature is that you can bet you your horse, or on other player’s horses….and no one knows who bet on who.
So what happens?
Players may intentionally play cards to knock their own horse out of a race. There are all kinds of strategies to remove horses, get them back into races, or eliminate them from contention after they’ve won.
The best player each year?
My nephew the successful attorney.
Not a surprise.
Opinions can change rapidly in a board game, or investing, which brings us to a recent US Treasury auction.
How a Treasury auction works
Simply put, a Treasury auction operates just like any other auction. The twist here is that the Treasury is selling bonds to raise money to fund the US Government.
So what makes the bonds attractive?
First, US government debt carries the higher credit rating (AAA by Standard and Poor’s), meaning that the risk of default is the lowest of any type of debt. So, buyers believe that they’re going to get all the interest payments, and a full return of principal.
There’s another factor.
What is the interest rate offered on the debt? Now, investors are willing to take a low interest rate, compared to interest rates offered on other debt. Investors take less interest, in exchange for more security.
Makes sense.
The impact of supply and demand
Supply and demand applies to auctions. If there are more sellers than buyers, prices will decline- there’s too much supply. The opposite is also true. If there’s heavy demand and more buyers than items available for sale, prices go up.
It’s true at a baseball card auction, or when treasury bills, bonds, and notes are auctioned.
Why changes in treasury demand may be a problem
The Wall Street Journal reports that “Overseas private investors and central banks now own about 30% of all outstanding U.S. government debt, down from roughly 43% a decade ago.”
The US has fewer Treasury buyers from overseas, meaning less demand.
“The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately.”
What about the supply of Treasuries?
“Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020.”
More supply, less demand. In this environment, sellers need to make items more attractive to buyers. So, that means selling Treasuries at higher interest rates. You’re not interested at 5.3% return, how about 5.7%?
Higher rates mean higher interest rates paid to Treasury bondholders. Interest payments become a bigger portion of the federal budget.
Keep your eye on this important issue- it has big implications for the US.