When 700 Years Meet Five Percent

Last week the U.S. Treasury auctioned $70 billion in 5-year notes. By any conventional measure, this was a weak auction in which buyers needed concessions:  

• The notes were priced at a yield of 5.03%, well above the 5.00% level implied by pre-auction trading. Investors demanded a premium to absorb the supply, resulting in the highest 5-year auction yield since June 2006.
• The difference between the pre-auction yield and the highest accepted auction yield was one of the largest on record for this maturity. At 3.1 basis points (bps), the difference was roughly five times the recent six-auction average of 0.6 bps.
• “Indirect bidders,” the proxy for foreign central banks and large institutional buyers, took just 54% of the auction versus their usual 65%.
• Primary dealers, who only step in when the market won’t absorb supply on its own, were left holding nearly 16%, which is well above their typical share.

Since 2023, bond investors have been increasingly worried about a combination of fiscal, inflationary and global economic factors that are pushing long-term treasury yields to multi-decade highs. These concerns reflect both U.S.-specific issues and broader global trends.

Zoom out, though, and 5% yields look less like an anomaly and more like a homecoming. Economic historian Paul Schmelzing built the most rigorous dataset available on the history of global real interest rates spanning 1311 to 2018. Over that 700-year span, the global real interest rate averaged 4.6%, against average inflation of roughly 1.6% per year. Add those together and you get a rough long-run nominal benchmark in the 6–7% range. Against that backdrop, a nominal 5-year Treasury yield just above 5% is arguably still on the low side of seven centuries of precedent.

What makes last week’s auction feel jarring is the shape of the more recent past, not the deep past. Schmelzing’s central finding isn’t the average but the seven-century trend. Real rates have declined persistently for seven centuries, through empires rising and collapsing, plagues, world wars, and the invention of central banking itself. A postal worker taking out a mortgage today can still borrow more cheaply, in real terms, than a Florentine prince in the Renaissance. The 2008–2021 stretch of near-zero rates was, in that context, the true outlier—a compressed slice of a much longer chart that investors mistook for the new normal. Markets built balance sheets, retirement models, and government financing plans around that anomaly persisting.

That’s what makes last week’s auction interesting. A 5.03% yield with weak demand isn’t the bond market breaking; it may be the bond market re-anchoring to something closer to its historical average after a decade and a half spent somewhere unusual. Investor demand and discomfort, and dealers absorbing the slack, are not necessarily signals that yields are too high. They might be signals that the world had become too familiar with rates that, viewed against 700 years of data, were never especially normal to begin with.

Gary B. Martin