The yield on the 10-year is slowly creeping back up
When the Federal Reserve officially announced its intention to begin purchasing Treasuries in an effort to lower interest rates a week ago, the yield on the 10-year treasury immediately crashed from around 3.0% to under 2.5%. Don't look now, but even though the Fed's buying spree officially kicked off today, the yield on the 10-year has been slowly creeping back up. The 10 is now just under 2.8%. This isn't exactly what the folks at the Fed had in mind when they pulled out the big gun.
The move in the 10 was likely in response to the weaker than expected demand that was seen in today's 5-year offering by the Treasury Department. Bidders in today's 5-year auction offered only $2.02 for every dollar sold, compared with an average of $2.17 over the past four 5-year auctions. Furthermore, "indirect bidders" a widely followed metric because it includes the purchases of Treasuries by foreign central banks only purchased 30% of the bonds that were sold in the latest auction. This is the lowest percentage of indirect bidders since December.
I will be keeping a close eye on what demand is like for the $24 billion seven-year auction tomorrow. It is definitely too early to draw the conclusion that investors in general, and foreign central banks in particular, are beginning to lose interest in purchasing U.S. government debt, but it's definitely something to keep an eye on. The Fed rolled out its Treasury purchase plan in an effort to get interest rates to fall. Lower interest rates, specifically lower mortgage rates, provide homeowners who refinance with more disposable income and theoretically would help slow the drop in home prices. Obviously, higher interest rates would do the opposite...they might even GASP encourage people to save their money in the bank. That's definitely something the government doesn't want anyone to do right now. They want to punish savers, not reward them.
Also of note, the U.K. - leader of quantitative easing pack - failed in its attempt to auction $2.4 billion in gilts today. This is the first failed auction there since 1995.
This is getting very, very interesting. Have investors decided that they want a reasonable rate of return from governments that are printing money like crazy (I know that I certainly won't be purchasing Treasuries any time soon)? Will the Fed's purchases be able to hold down the yield on the 10-year?
As I said earlier, it's too early to say. Many people certainly have been calling for an implosion of the Treasury bubble and higher interest rates. Anyone who's long equities had better hope that we don't see anything like that happen in the near future. Significantly higher interest rates would be devistating for the economy at a time like this.
Treasurys extend losses after record 5-year note auction