Global Non-Financial Corporate Debt Hit a Record High of 92% in Q3 2018, Flashing Red Indicator Warns of Rising Risk of Financial Crisis

The demand for debt issued by the U.S. federal government has been plunging despite rising yields, and this is a worrisome sign to some observers. During 2018, the U.S. Treasury issued notes and bonds worth $2.4 trillion, but the bid-to-cover ratio, which compares the value of bids received to the value of debt actually sold in Treasury auctions, was at its lowest since the financial crisis year of 2008, per data from Bloomberg reported by Business Insider (see below). “All financial crises begin with a declining bid-to-cover ratio,” warns Torsten Slok, the chief international economist at Deutsche Bank.

A Flashing Warning Light

• In 2018, bids for U.S. bonds were only 2.6 times the value of those offered
• Lowest demand since 2008
• Down from a recent peak of 4.0 times in late 2012
• May make it harder for U.S. to finance its growing federal deficit

Source: Bloomberg, as reported by Business Insider

Given that the yield on the benchmark 10-Year U.S. Treasury Note had reached its highest level since 2011, the diminishing bid-to-cover ratio suggests declining confidence in the obligations of the U.S. federal government as a virtually risk-free safe haven for investors. This is especially troublesome in the face of rapidly increasing budget deficits for the U.S.

“All financial crises begin with a declining bid-to-cover ratio.” — Torsten Slok, chief international economist, Deutsche Bank