What to watch

Treasury auction can be revealing

The U.S. Treasury goes to the well again next week, and the week-long auctions of the nation’s debt are always worth looking at.

The U.S. has $13.1 trillion in public debt, which is what we owe to people who own Treasury bills, notes and bonds. (We owe another $5.1 trillion via the Social Security and Medicare trust funds, but that’s another story.)

When the Treasury sells its securities, it does so via auction. It fills the bids with the lowest yields first, because the priority is to get the best deal for taxpayers. At the last auction, the Treasury sold about $21 billion in 10-year T-notes at 1.88%. While that’s a remarkably low yield, it looks golden to many foreigners. For example, a Japanese 10-year government yields 0.42%. It’s no wonder that the Japanese are the largest foreign holders of Treasuries, with $1.2 trillion. (The nation with the most is the U.S.)

What should you look for at the auction? Pay close attention to the bid-to-cover ratio. That’s the number of bids the Treasury gets vs. the amount it has to sell. At the last 10-year T-note auction, the government got $2.62 in bids for every $1 of T-notes it offered.

That’s not bad: The bid-to-cover at the previous three auctions was $2.63 per $1 offered. A dramatic decline in the bid-to-cover would mean weak demand and higher yields ahead.

You should also check how the bond market reacts. If yields spike up, the auction went badly, and there could be trouble ahead for both stocks and bonds.