Treasury Market Survives This Week’s First Test

The U.S. Treasury sold $28 billion of three-year Treasury notes and $21 billion of 10-year notes today–and the price of the 10-year note actually climbed, taking the yield down to 2.87%, three basis points lower than Friday’s 2.90% yield.

This was a good result for the bond market and for the U.S. Treasury, which has the task of selling something like $1 trillion in new debt this year.

The worry, of course, is that with so much supply on the market, buyers will ask for higher yields, and that will drive bond prices lower and make it more expensive for the U.S. government to use debt to pay its bills. That kind of increase in yields in the Treasury market would have the knock-on effect of weakening the dollar. A weaker dollar would increase the price of imports for U.S. consumers and businesses. That in turn would push up inflation and would lead the Federal Reserve to get more aggressive about raising interest rates to head off inflation. Which would, in turn, slow the economy.

Today’s sale drew increased attention since it came just a day before the release of the February Consumer Price Index measure of inflation. Economists surveyed by Bloomberg are projecting that headline inflation may have edged up to an annual rate of 2.2% in February from 2.1% in January. The consensus is that core inflation will remain at an annual rate of 1.8%.

The Fed’s preferred inflation measure is the Personal Consumption Expenditure Index, which typically runs a half a percentage point lower than the CPI. The Fed has set an inflation target of about 2% on the PCE measure.