Wall Street "Warns" Trump! Two-Year Treasury Auction "Unusually Dismal," Market Approaching "Inflection Point"

The ongoing conflict between the U.S. and Iran continues to escalate, and Wall Street is issuing a direct warning to the market—U.S. Treasury auctions are cooling off.

On Tuesday, March 24, a $69 billion two-year U.S. Treasury note auction faced weak demand, falling far short of expectations, with foreign investors nearly absent.

The two-year U.S. Treasury sold at a yield of 3.936%, higher than the yield level in the secondary market immediately before the auction, creating the largest tail spread since March 2023 and highlighting weak market appetite.

Additionally, CCTV reports that some units of the 82nd Airborne Division are about to be deployed to the Middle East. Dual factors pushed the two-year Treasury yield up by as much as 10 basis points to 3.96%, a nearly eight-month high, and caused yields across all maturities to rise temporarily.

TJM Institutional Services interest rate strategist David Robin attributes this result to the highly uncertain market environment:

Today’s auction unfortunately took place during a very difficult, turbulent, and uncertain period. Why enter now? The risk-reward ratio is heavily tilted toward risk.

Notably, after Tuesday’s U.S. stock market close, CCTV News reported that Trump said U.S.-Iran negotiations are “probably close to reaching an agreement,” and Iran has agreed never to develop nuclear weapons. Reports also indicate the U.S. intends to cease fire for a month and has proposed 15 peace talks plans.

U.S. Treasury yields temporarily declined, partially erasing the day’s gains, and oil prices also fell in after-hours trading. However, this did not fundamentally change the cautious tone of the market. There is a $70 billion five-year Treasury auction scheduled for Wednesday and a $44 billion seven-year auction on Thursday to be absorbed.

Oil prices drive inflation concerns, and the rate cut expectations have completely reversed

This auction set the highest yield for two-year Treasuries since May, while just a month ago, the last two-year Treasury auction on February 24 produced the lowest yield since 2022.

Ultimately, the Middle East conflict has kept oil prices high, fueling inflation expectations. The Federal Reserve’s hopes for rate cuts this year are nearly shattered, and markets are even beginning to price in rate hikes.

Oxford Economics chief analyst John Canavan points out:

High oil prices keep the market pricing in a slight rate hike by the Fed this year. Uncertainty also causes potential auction demand to temporarily retreat.

He also states:

The sell-off in U.S. Treasuries is partly an instinctive reaction to poor auction results, but weak demand itself is also partly due to high oil prices.

Ameriprise chief market strategist Anthony Saglimbene notes:

High oil prices have exerted real pressure on the U.S. economy through rising prices and declining employment. Until there are clearer signals regarding the Middle East situation, especially the Strait of Hormuz, the stock market will remain under pressure.

The overall rise in U.S. Treasury yields also means higher borrowing costs and tighter financial conditions, directly weighing on businesses and consumers. It is estimated that about $10 trillion in debt will mature and need refinancing within the next year, and the pressure from rising borrowing costs should not be underestimated.

The two-year Treasury is typically the most sensitive to monetary policy expectations. During rate-cut cycles, it should attract safe-haven funds. However, current yields are rising instead of falling, and auction demand has significantly shrunk, indicating that investors’ outlook on policy prospects is changing.

As Anthony Saglimbene states:

The market is beginning to doubt that things will be resolved so easily.

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