The behavior of bonds as financial instruments and the mechanics of bond markets are among the most complex areas of finance and economics to understand or theorize about and explain to others. Bonds themselves are simple on the surface yet abstract many complex financial, economic and political fears and involve exponential mathematics to derive their value. This complexity makes stories about bond markets ratings poison to media and leaves most of the public completely clueless about how bond markets affect the larger economy and their individual finances. Most of the public that even follows stocks is clueless to the fact that the most commonly quoted factoids about the stock market's performance are grossly distorted. In the S&P500 index, forty percent of the index's total value is concentrated in TEN of the FIVE HUNDRED stocks in the index and most of them are tightly associated with AI technology which is in a bubble.
Current economic conditions make this inscrutability of bond markets to average citizens a significant danger. Bond markets not only reflect a larger share of total wealth than stocks ($55 trillion for bonds versus $49 for stocks) but the direct, exponential relationship between the value of bonds and inflation (feared and actual) means that bond markets act as a magnifier of the tiniest changes in direction in the economy, both domestically and worldwide. A review of events in a single week, the week of August 4, 2025, makes warning signs in the larger economy very clear and makes it very evident those dangers will trigger rising interest rates, credit contractions and a major threat to economic stability in the near term – months.
To step through this analysis, a short summary of the key events will be provided first, followed by some background on the mechanics of Treasury auctions for US debt then a broader review of dependencies that are lining up.
First, The News
Treasury Auctions -- The Treasury conducted normal sales of debt via routine on-line auctions the week of August 4, 2025 but market followers noted the results of several of the larger auctions were noticeably non-routine. Specifically, an auction on 8/6 selling $42 billion of 10-year notes and an auction on 8/7 selling $25 billion of 30-year bonds resulted in indicators of market interest and inflation expectations that suggested a much wider discrepancy than the Treasury expected. This was in spite of other economic news that normally would make the relative security of Treasury securities more attractive as an alternative for investors. This was likely due to the fact that August 7, 2025 also included an auction of a record $100 billion in 4-week bills following a $95 billion dollar auction of 4-week bills just the week prior.
Declining Home Sales -- A variety of banks and trade associations tied to housing have all issued public statements forecasting unit home sale volumes dropping to 30 year lows due to high mortgage rates while others publicly state home sales may drop even with zero mortgage interest rates because buyers simply cannot afford existing or new homes. In the same period, stories also came out indicating that prices of condominiums are declining in virtually all cities that experienced a price bubble over the past five years. Price declines are frequently hitting ten to twenty percent from peak prices a year ago.
Auto Market Statistics -- Statistics for new and used care sales are reflecting major affordability problems for consumers. Average statistics for price ($47,000), monthly payment ($745) and term (68.6 months) are concerning enough. Within those averages, many purchases are hitting the $70,000 and up range which is triggering even longer loans – 19.8% of new loans opted for terms 84 months or longer. Used car sales involve a much smaller share of purchases requiring loans (only 36.5% versus 80% of new car buyers) but those that did finance also opted for longer loan terms, averaging about the same as new cars at 67 months. Perhaps the ost ominous number is the share of car loans delinquent by 90 days or more. That number averages about 3.5% but is now around 4.99%. In general, lenders find that auto loans are the LAST bill that customers stop paying because a repossession of a car happens nearly immediately and no car means no ride to work which means no paycheck which jeopardizes everything.
For individuals following these stories about home sales and car sales amid a job market seemingly frozen amid layoffs by some of the most profitable firms on the planet, these should certainly trigger concern about events over the next few quarters. However, with a bit of insight into the mechanics of Treasury auctions and bond market psychology in general, the underlying reality seems even more concerning.
How the Treasury Auctions Debt
Most states have Constitutional language banning them from borrowing money for operations and requiring them to run with a balanced budget each year. The federal government obviously has no such restriction and has been required to raise copious amounts of cash on a nearly daily basis for routine operations. These sales of debt are over-simplified when covered in the media and likely leave most people with the impression that the Treasury puts new debt on a plate, puts the plate on a picnic table outside the Treasury, rings a bell and the world comes and buys up whatever the Treasury decided to sell at whatever price the Treasury chose to set. Given the attention paid to budget approvals and debt ceilings, Americans could be forgiven for also assuming the Treasury calculates each new year's deficit, then goes out and essentially takes out a single new loan for that new deficit and adds it to the stack of IOUs currently totaling $37.212 trillion dollars.
None of these assumptions are remotely true.
First, the Treasury sells new debt nearly every work day of every week throughout the year. A fiscal budget reflecting a $1 trillion dollar deficit doesn't mean that all $1 trillion of that deficit is needed immediately in cash, only over the course of the entire fiscal year. The Treasury divides up that new DEFICIT amount then factors in expected cash needs for upcoming bills, notes, bonds and coupon payments coming due and establishes its own internal schedule on when it wants to raise new cash via sales. Like individuals take out different loans over different terms for different purposes (car loans, home improvement loans, college loans, home mortgage loans), the Treasury sells bonds over a wide variety of time maturities such as 4, 6, 8, 13, 17, 26 (bills) and 52 weeks, 2, 3, 5, 7 and 10 years (notes) and 20 and 30 years (bonds). (Note: for clarity henceforth, all of these will be referred to as "bonds."). This gives the Treasury the flexibility to adjust future cash demands by altering maturity terms, choosing how much debt to pay off versus roll over and allows the Treasury to take advantage of fluctuating interest rates when they change to the Treasury's advantage.
For each individual sale of debt, the Treasury does not dictate the price of the bonds. Instead, it uses a process called a Dutch auction to sell new debt to the public. In a Dutch auction, the seller pits all potential buyers against each other by providing notice of the sale date, the total aggregate value of the sale and the number of bonds being sold. Bonds typically have $1000 face value denominations so a sale of $10 billion of debt would involve 10 million bonds. So that means the bond price is $1000 right? Wrong.
Because bonds are a debt instrument involving a promise to pay the face (par) value back on some future fixed date, the "price" of the bond is discussed with two related metrics – either its current price (which reflects the net present value of its interim coupon payments and the final payoff from the Treasury at maturity) or its yield (the effective interest rate used in the NPV calculation that results in the bond's current price).
When the Treasury opens the auction, anyone (literally anyone – primary dealers, large banks, investment firms and individual investors) can view the offering and submit a bit for a portion of the offering. In theory, each bidder evaluates the size and maturity term of the offering, examines interest rates in the rest of the market from other borrowers, looks at the coupon rate offered by the Treasury's new offer, then calculates a price they believe adequately compensates them for the risk they are taking by lending the government that much money at that rate over that term. They then submit their bid for X units at P price. The bidding is typically open online for one hour then the Treasury closes the bidding then sorts all of the bids from highest price to lowest price, accumulating the total number of bonds reflected in each bid. When a bid is reached whose X unit count adds up to reach the total quantity of bonds in the offer, the price of THAT bid becomes EVERY bidder's price and the Treasury then finalizes the sale. If that last bid was for $851.23 on a $10 billion auction of $1000 bonds with 4% coupon payments every six months, the Treasury nets $8.512 billion dollars from the sale while adding $10 billion to the nominal debt. That price of $851.23 reflects a rough consensus that buyers expect a real yield of 6% on that 10-year bond over its life.
With that background into the auction process, statistics resulting from that process and the psychology market watchers derive from those statistics can be explained.
Mapping Auction Statistics to Psychology
First, as stated earlier, the Treasury conducts auctions of new debt nearly every work day of every week and the amounts and terms of these bonds being issued vary widely based upon economic conditions. These statistics have been collected for DECADES and thus have been found to fall within certain bounds under all but the most unpredictable circumstances such as the September 11, 2001 attacks or specific days within the 2008 financial crisis. In short, professionals have a clear idea of what "normal" is for these auctions.
Second, it is truly the buyers and not the Treasury that set the price of each auction that dictates how much actual cash the Treasury will collect when closing the sale. The Treasury chooses the nominal dollar value of the entire issue and chooses the coupon rate paid on longer term notes and bonds but the BUYERS ultimately do their own calculations based on their own assumptions about inflation and the risk of default by the Treasury versus other alternative investments and use that to set their bid price. This has two key implications.
- If the Treasury's coupon rate is materially lower than expected inflation, bid prices will likely be significantly lower than face value, drastically reducing the net cash raised by the sale. This acts as a sign that the market does not agree with the Treasury's expectations or wishful thinking about inflation and interest rates and demands a higher premium. Since the Treasury dictates the coupon rate, the only way bidders have to collect a higher yield is to lower the price being bid for the bond.
- If bidders bid prices significantly higher than the par value, that historically has been a sign of relative fear in markets, either a presumption that Treasury debt is more secure than corporate debt or leaving cash invested in stocks.
Third, buyers can not only signal disinterest in a particular issue by low-bidding on the offer, they can also just NOT BID. When the volume of bidders (or the net value of their bids as a fraction of the total sale) drops precipitously, inevitably lower sale prices will result. In theory it is possible for a Dutch auction to "fail", meaning the total value of all of the bids doesn't even equal the quantity of debt being sold (e.g. all bids only add up to $9.1 billion on a $10 billion auction). In reality, this doesn't happen because the larger bond market includes institutions given special privileges in exchange for acting as "primary dealers" which obligates them to act as market makers to provide liquidity for situations where demand does not equal supply. These primary dealers are required to step in and bid for any remaining bonds if bids haven't totaled up to the sale quantity.
Here are the key statistics gathered from Treasury auctions that are watched by professionals:
Bid-to-cover Ratio -- This is a ratio reflecting the extent to which bids exceeded the total sale amount offered for sale by the Treasury. Bids typically exceed the nominal sale amount by many multiples so lower numbers reflect a lack of interest in that offer which may indicate larger concerns about government policies regarding debt levels, inflation, monetary policy, etc.
Yield -- This is the effective return that will be earned by the buyer based upon the sale price, coupon rate and term. Bidders want this to be as high as possible (reflected by a lower sale price) while the Treasury wants it to be as low as possible (reflected by a higher sale price).
Allocation -- This statistic summarizes the share of the total offering bought up by different categories of buyers including primary dealers, direct bidders trading for their own benefit and indirect bidders acting as buyers for foreign entities. Ideally, demand is high enough that primary dealers never need to act in their market maker role so 100 percent of the sale maps to direct and indirect bidders. As the share of the sale purchased by primary dealers goes up, concerns rise as well about liquidity and the attractiveness of federal government debt.
Tail / Through - When a particular issue first opens for bids, the Treasury publishes prices of those bids so everyone can get an idea of the general sentiment in the market for that offer. When the bidding is closed and a final price point identified, any drop between that initial opening price and the final price is termed a tail. Similarly, if the final price is higher than the opening price, that difference is termed a Through. (NOTE: Conceptually, this perception gap could be reported as the +/- delta from the opening price versus the final resulting price OR the +/- delta in the yield of the bond. In practice, Tail / Through is reported in terms of the yield with units of basis points" with a basis point equal to 1 percent of 1 percent – EXCEEDINGLY SMALL values.) These Tail / Through statistics provide another indication of the relative strength or weakness in demand for a particular issue based on the price levels being bid during the auction. Small values are essentially immaterial random numbers but large values can be problematic. Large Tails reflect unusually weak demand which can thus reflect concerns about either the security of the issue or its yield being insufficient for current market conditions. Large Throughs can reflect unexpected interest in divesting from other corporate bonds or stocks in favor of Treasuries as a "lifeboat" for future expected financial turmoil.
Re-examining These News Stories
With this background in Treasury auction mechanics and psychology, the news regarding recent auctions can be placed in a more understandable context. Remember those highlights:
- Auction on August 6, 2025 of $42 billion of 10-year notes
- Auction on August 7, 2025 of $25 billion of 30-year bonds
- Auction on August 7, 2025 of a record $100 billion of 4-week bills
For the $42 billion dollar 10-year auction, the bid-to-cover was quite low, around 2.35 and the resulting interest rate on 10-year notes rose 2 basis points from 4.20% to 4.22%. The "tail" on the auction was 0.9 basis points. The allocation showed primary dealers purchased 16.2% of the issue, up from an average of 14.2%.
For the $25 billion dollar auction of 30-year bonds, the bid-to-cover was again low at 2.27 and the resulting yield on 30 year bonds rose to 4.813%. The "tail" was 2.1 basis points. The allocation showed primary dealers purchased 17.5% of the issue.
For the $100 billion dollar auction of 4-week bills, The tail was 0.5 basis points – notable since interest rate expectations over extremely short periods of four weeks should be far easier to predict than 10 and 30 year bonds. The allocation showed primary dealers purchased 32.1% of the offering. (The share sold to primary dealers is not consistent across maturities so this statistic can only be compared to shares in auctions of identical terms.)
For reference, here is what the official Treasury news release looks like for a completed auction, using this $100 billion auction on August 7, 2025 as an example:
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2025/R_20250807_1.pdfIn general, reaction in the markets was quite pessimistic, as evidenced by the relatively high share of bonds purchased by primary dealers and given the significant mismatch between Treasury expectations of acceptable interest rates and expectations by bidders as reflected in the tail amounts. Since a basis point is essentially a percentage point of a percentage point, these "basis point" spreads seem insignificant. However, the Treasury incorporates current interest rates as reflected by prices of existing bonds of similar maturities when setting coupon rates of new issues. Therefore, when actual bids come in with LOWER prices (which reflect a demand for HIGHER interest rates and yields), tails on new bond issues act as a warning sign from markets to the Treasury that the market sees growing risk it expects the Treasury to reflect.
Bond market watchers who follow these auctions analyze these statistics and try to boil them down to a "grade" reflecting how well the Treasury's offering met expectations in the market while meeting its immediate need for cash. The grades assigned to these auctions were consistently low – D.
What is driving the disconnect between the Treasury and bond market watchers? The watchers believe the Treasury is assuming it will succeed at jawboning the Federal Reserve Bank in lowering interest rates. That is why it is rolling over so much maturing debt into such short terms. It assumes rates will be LOWER in just a few weeks allowing that debt to be rolled over AGAIN at lower rates. The Treasury may believe this but the market clearly does NOT and is concerned the government is destabilizing its cash flows by placing such huge bets on short term interest rates that can change rapidly in EITHER direction. One can extrapolate one layer deeper into fear and theorize the larger market is additionally concerned by this shift to short term debt because this shift limits the government's ability to raise ADDITIONAL emergency cash should something REALLY bad happen, like, oh… I dunno… Maybe a stock market crash, another banking meltdown or a natural disaster. These fears are completely rational. The federal government is betting everything goes right and nothing goes wrong anywhere in the economy while pissing on allies and prior trade partners and adding trillions in additional debt.
So if the take from professionals on the lending side of the credit market is tending pessimistic, how will that affect consumer borrowers and the larger economy?
First, it's notable that the expected (feared?) square wave jump in tariffs and prices didn't happen in lock step with the initial threat of new tariffs on April 1, 2025. Many of the largest tariff rate jumps were deferred for weeks then months as the Trump Regime promised looming "deals" that might be lower than the originally threatened rates. As a result, second quarter economic results did not reflect skyrocketing tariffs – only drops in tourism and the value in futures contracts for farmers. But note that despite these delays, job growth in America has already tanked in 2Q2025. Since July 1, some tariffs – notably those for Japan, Mexico and Canada – HAVE been officially set and are beginning to affect prices. Now things officially get interesting.
One way of thinking of the feedback cycle that will become magnified over the next few weeks and months is to think of this series of input changes rippling through the economy in a loop:
- reduced demand from tariffs finally kicking in in key consumer sectors
- tariff costs split between corporations (as reduced margins and profits) and consumers (higher prices)
- lower profits triggering "earnings surprises" in stocks priced for perfection, driving falling stock prices
- higher prices triggering further reductions in consumer demand
- reduced demand triggering additional job reductions, further reducing household income
- higher unemployment increasing credit defaults on cars and homes
- any negative surprises in the stock or bond market due to price / rate fluctuations raising the likelihood of derivative based faults that trigger larger and larger surprises
With that relatively generic feedback cycle in mind, some examples can be examined in more detail.
EXAMPLE: The Automotive Market
It is very odd to see stories that both Ford and General Motors recorded surprisingly high unit sales and revenue for the second-quarter period of 2025. That wouldn't seem to indicate consumers are unwilling to buy new vehicles or obtain loans for them. However, financial results for car MAKERS have to be read with a healthy dose of skepticism. The "sales" reported in quarterly earnings of the MAKERS are sales from the MAKER to its DEALERS. They are not unit sales from dealers to customers. While Ford and GM reported high sales, inventories on their dealer lots are ranging from 90-120 days. That means given their average sales volume over the prior 30 days, the number of cars remaining on their lot would last those dealers for another 90-120 days of sales, even if they don't accept a single additional car from the maker.
With tariffs now in effect, car MAKERS would like to raise prices to maintain their same margins while eating the additional cost of the tariffs. If their dealers had NO cars on the lot and consumers clamoring to buy up any new vehicle sight unseen, makers might be in a position to do that. When the dealers have nearly 4 months of unsold inventory of already high prices, they will not be able to accept even HIGHER priced vehicles and move them without drastically lowering prices on the existing unsold units. That will drive down ALL prices, including used car prices, sticking dealers with massive losses.
At a minimum, this will likely trigger the bankruptcy of hundreds of dealers across the country, spiking unemployment. If auto makers properly recognize the situation and STOP MAKING NEW VEHICLES until demand eats through inventory, this will trigger a spike in unemployment among assembly workers and any workers in US parts manufacturers used in the cars not selling or being made.
EXAMPLE: The Housing Market
The housing market reflects many unique pathologies of its own making beyond its obvious susceptibility to interest rates. Housing construction has not kept up with the growth in "households" since 2006 and prices in many markets have been driven up by investment firms buying up standalone homes and condominiums as investments. Despite public support for "affordable housing", most communities continue enforcing and enhancing zoning policies that make the most cost-effective modes of housing illegal for fear of driving down existing home values – either due to density or the characteristics of the residents who might buy the units.
As of 2025, the housing sector seems to be destined for a shock. August reports for new home starts showed a 9.6% jump to an annualized rate of 1.36 million units. Unfortunately, at the same time, housing lenders and industry trade groups issued reports forecasting home sale volumes dropping to 30-year lows due to high mortgage rates. Other stories have further elaborated that affordability is so poor and buyers so strapped for cash flow that home sale volumes may drop even if mortgage rates dropped to zero.
Lower prices could solve some of these problems but pose their own dangers to individual owners and the larger market. Trade press and local news stories are reporting "bubble" areas like Miami and Austin are seeing significant price drops of between ten and twenty percent from highs in 2022. For those existing owners, this could trigger a financial crunch if they want to change jobs and relocate or lose their current job providing the income to make the mortgage payment. For relocations, even if the employer eats the loss, that home sale will still drive down "comps" for nearby homes and apply downward pressure in the local market. Owners needing to sell after losing a job will also drive down "comps" but will also immediately realize a large cash loss they may already be unable to afford due to the lost of a job. In bubble areas, these losses might range from $50,000 to $100,000 for an "average" home. Most households do NOT have the wherewithal to eat a $50,000 loss and still come up with cash to plow into a new home. Such losses will likely result in a downshift into a lower standard of living and significantly less spending. This shrinkage in spending ripples through the larger economy as another round of contraction in demand.
The higher share of homes owned by financial investors further complicates dynamics in the housing market. If one hundred percent of homes were owned by their occupants, a downturn in market prices for one or two years might lead those occupants to stay put rather than eat a drop in equity unless they absolutely HAVE to relocate. When an investor or hedge fund owns hundreds of units of single-family homes or condominiums, many of which might be vacant, there's no stay / move decision to make, only a keep / sell decision. These institutional owners may be more eager to minimize losses by dumping properties before they become too far underwater. This can add downward momentum to prices which can trigger more institutional selling and accelerate the downward spiral.
One final timing consideration with the housing market merits consideration. The NIMBY zoning restrictions affecting construction across the country, limits on trade labor for construction, spikes in construction commodity prices during the pandemic and a boom in high tech workers relocating after being promised perpetual work from home arrangements resulted in a particularly insidious set of economic circumstances:
- Most homes constructed over the last five years have above average prices and are for larger homes
- Most of these homes were overpriced due to the premiums paid for labor and supplies as the construction business sorted out pandemic problems
- A significant share of these newer homes in "bubble" markets such as Austin were built for employees who moved from even more expensive cities in California or New York. These buyers likely had significant cash extracted from their prior expensive home to plow into a cheaper but still expensive new home.
- Given the high prices paid for many of these homes, the ownership is likely skewed towards white-collar professions – technology in particular – that are being impacted by current layoffs
In this line of thinking, it may very well be the case that those most likely to be squeezed by a contraction in housing prices are homeowners who recently relocated and are most likely to lose their job in the coming months, triggering a personal financial crisis that was unthinkable only a year ago.
The net-net of this recent bond market news is that professionals in the bond market are clearly worried about the sanity of Treasury strategies for managing the massive debt of the United States and seem worried this swing to short term financing will leave the federal government with nothing in the tank to counteract any other economic shock that might hit. The negative feedback loops triggered by the disastrous tariff strategies imposed by the Trump Regime ARE beginning to exhibit themselves in the demand side of the economy and seem poised to ripple into the supply and employment components immediately. And the apparatchiks in charge are pursuing strategies which no one in the larger financial markets would recommend.
WTH
