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TMFDeej (99.46)

The yield on the 10-year is slowly creeping back up

Recs

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March 25, 2009 – Comments (3)

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

Deej

3 Comments – Post Your Own

#1) On March 25, 2009 at 6:18 PM, AnomaLee (29.19) wrote:

Investors should understand the importance of this information.  There is a double-conundrum from here on out for Treasuries. Unfortunately, neither are positive.

I just wrote the following today:

AnomaLee
"Suppose we continue to receive good news that the economy is rebounding. This will promote risk taking. When risk taking increases many investors will flee from treasuries. We are increasing supply and affecting our own demand. I can easily foresee the U.S. being in an auction screnario just like the UK by the summer."

The Federal Reserve is manipulating the credit markets to nearly unprecedented levels. The bond market had known about the FRB's intention to buy treasuries since the start of this year and the market reacted that there was less incentive to buy[which raises yields]. As in any market, whenever there is a guaranteed buyer there is a great incentive to increase sales. Purchasers of official holdings have an greater incentive to increase their selling putting further pressure on the Federal Reserve to increase buying, and there's a moderate possibility that it could have a spiraling effect.

"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."

It is early, but the signs are being put up very fast that show where this is heading. These foreign purchases occur to maintain national interest and have always occurred at low levels of willingness and ability to maintain international financial stability, but it's the former[ability] that is the big concern. As long as the foreign major holders continue to run trade surpluses there is little need to sell their official US holdings to finance domestic spending.

Brad Setser has a good article on the situation: Did the Fed bail out China by buying Treasuries? [Link]

Unfortunately, Japan is quickly running towards a trade deficit. That is bad...

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#2) On March 25, 2009 at 10:32 PM, nuf2bdangrus (< 20) wrote:

Government debt issuance transfers money from a productive private sector to an unproductive public one....thereby hampering economic recovery.

 

Anybody long treasuries in this market is destined for a life of pain.  For short term moves, I like the TBT.  As a longer term hold, I employ RYJUX, a less leveraged treasury short play

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#3) On March 28, 2009 at 5:49 AM, camarodan64 (98.28) wrote:

This comment is in response to "Brad Setser has a good article on the situation: Did the Fed bail out China by buying Treasuries? [Link]"

 

Its more like the Fed is hiding the Fact that China wants its money back, and has decided to  purchase these bonds to mask the first wave of selling and prevent panic in the treasuries. 

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