U.S. Loses at World Cup and It’s Not Even Playing

(Bloomberg Opinion) -- It's bad enough for Americans that the U.S. men's team failed to qualify for the 2018 World Cup. But to add insult to injury, the tournament may have cost Uncle Sam during this week's Treasury auctions.

The U.S. government's three-month and four-week bill sales on Monday both drew the weakest demand since 2008 as measured by investors' bids relative to the amount issued. As a result, the interest rate that the Treasury must pay was higher than indicated before the auctions. In a note recapping the poor three-month bill offering, Thomas Simons at Jefferies suggested “the simultaneous Brazil-Mexico World Cup match might have had a negative impact on auction participation.”

At first glance, that seems like an all-too-convenient way to write off a poor result. After all, as my colleague Robert Burgess wrote, nothing is as unthinkable to investors as a failed Treasury auction. And this wasn't even a heavy lift — the U.S. auctioned just $35 billion of four-week bills, down from $65 billion in March.

But Citigroup Inc. strategists sought to prove the theory that the World Cup is influencing bond markets worldwide. And their results, which strip out seasonality in an attempt to create a fair comparison, are quite convincing. 

Using futures markets for 10-year U.S. Treasuries and German bunds, David Bieber and Kim Jensen found execution costs increased between 5 percent and 20 percent during World Cup matches. Compared with their “baseline,” Treasuries trading volume declined by 29 percent during the 2018 tournament. The depth of the bund market retracted by 32 percent relative to the norm, implying weaker liquidity, they found.

Overall, the Citigroup strategists found the World Cup is more “distracting” to European traders — not exactly a surprise, given the sport's greater popularity and Germany's early exit, the tournament's biggest shock.

The bid-to-cover ratio for four-week U.S. bills hit its recent peak on June 12, which just so happened to be two days before Russia and Saudi Arabia kicked off the tournament. No one would blame the ensuing three-week decline solely on the World Cup, but combined with the end of the month and the end of the quarter, plus a condensed auction schedule because of the Fourth of July holiday, it's easy to see how the lack of investor interest may not necessarily be a harbinger.

Plus, market depth and volume similarly tumbled during the 2014 World Cup. Maybe bond traders are simply taking Citigroup's advice: “Enjoy the football spectacle or pay higher execution costs.”

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

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