The Treasury market is facing a crucial vote of investor confidence

By Joy Wiltermuth

The 30-year Treasury bond still matters, as it can be a measure of trust in the U.S. government

Treasury Secretary Scott Bessent speaks at the White House this week.

The U.S. Treasury's auction of 30-year bonds on Thursday will be a crucial test for markets as America's long-term borrowing costs rise to their highest levels in 24 years.

The Treasury plans to sell $22 billion of 30-year bonds, a day after a strong 10-year Treasury auction briefly improved the jittery tone in markets around rising yields globally.

Yet as the Iran war risks re-escalating, high oil prices and stubborn inflation pressures could raise important questions for the Federal Reserve as officials prepare to make a decision later this month on short-term interest rates.

The 30-year Treasury yield "is the one maturity the Fed does not control, and the one the world has to want," said Vincent Ahn, portfolio manager at SLW Investments, on Thursday morning.

The 2-year Treasury yield BX:TMUBMUSD02Y can be considered a bet on what the Fed does next year on interest rates, but the 30-year yield can reflect "the price of trusting a government with your money for a generation," Ahn told MarketWatch.

This comes as uncertainty around inflation and the U.S. deficit remain elevated, and the U.S. needs help financing its $40 trillion national debt.

Six months ago, a sustained push above 5% for the benchmark 10-year Treasury yield BX:TMUBMUSD10Y and its 30-year counterpart was viewed as unlikely, as MarketWatch has reported.

"Not long ago, 5% was viewed as a line in the sand," Bret Kenwell, U.S. investment analyst at eToro, wrote in commentary Thursday. "Now, investors are questioning whether that threshold has moved closer to 6%."

On Thursday, the yield rose to an intraday high of 5.732%, the highest yield seen since June 2002, according to FactSet data, before paring gains to 5.661%.

The gap in yields comes as this year's deluge of corporate debt from the "hyperscalers" in the artificial intelligence race is expected to grow next year.

Alphabet (GOOG), Meta (META), Amazon.com (AMZN) and other megacap tech companies leading the AI build-out have been borrowing for 10 years, 30 years and even 100 years in global markets to finance their efforts.

"Washington needs capital. Hyperscalers need capital. Data centres need capital. Power generation needs capital," Stephen Innis, managing partner at SPI Asset Management and a global market strategist, wrote in commentary Thursday. "If the desired level of investment rises faster than the available pool of savings, the system needs a higher return to make the pieces fit."

Higher yields are already a stumbling block for parts of the stock market SPX beyond tech, especially among small-cap stocks RUT that until recently had been outperforming this year.

On a bright note, Wednesday's auction of benchmark 10-year Treasury notes BX:TMUBMUSD10Y showed that yields have climbed high enough to attract strong demand.

But 30-year Treasurys BX:TMUBMUSD30Y are a different animal than the 10-year, as liquidity tends to be thinner, while buyers tend to be pensions, insurers and some foreign accounts, Ahn at SLW said. Dealers tend to avoid those bonds, in part because their values can be more vulnerable to swings when things like inflation concerns flare up.

"So, a 30-year auction is the one place where the question is not what price, but who shows up," Ahn said. A strong auction could calm markets more. But weak previous auctions of long-end bonds have been prone to sparking fresh rounds of selling in global sovereign-debt markets, he added.

U.K. 30-year yields BX:TMBMKGB-30Y hit 6% last week but have since eased slightly. The dramatic selloff in French bonds also remains a focal point in global markets.

-Joy Wiltermuth

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