Poor Treasury Auction Results Rattle Investors

On the heels of Britain’s failed debt auction yesterday, our Treasury had its own trouble selling bonds. WSJ:

The indirect bid — demand from domestic and foreign institutions, including foreign central banks — for the $34 billion five-year Treasury note auction was 30%, compared to 48.9% from the previous auction in February and an average of 30.1% for the last 10 auctions.

The 10-year note declined 18/32, pushing its yield back up to 2.77%. The yield had fallen to around 2.50% last week after the Federal Reserve unveiled its plan to buy longer-term government debt.

Bloomberg noted the following:

U.S. securities dropped even after the Federal Reserve today bought $7.5 billion of Treasury notes, its first targeted purchases of U.S. securities since the early 1960s. The five- year auction drew a yield of 1.849 percent.

“This caught a lot of people unaware,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., one of the 16 primary dealers that are required to bid at Treasury auctions. “Prior to the auction the Fed conducted its purchases of Treasuries, which may have compressed interest rates below where they would have been otherwise.”

Reader Ted asked in the comments earlier yesterday why I have such a big problem with budget deficits and with debt. It’s a good question, in light of all the posting I’ve done on the subject recently. Problem 1: it’s a matter of national security. To the degree our government isn’t able to fund itself, that may compromise our national interests. Problem 2: Crowding Out. The more debt Treasury dumps onto the market, the more upward pressure will be placed onto interest rates across the credit spectrum. As painful as it would be, letting the system de-leverage now would be preferable to racking up yet more debt to be worked off later.

Will the market be able to absorb the $2.5 trillion worth of Treasurys that Goldman says we’re on pace to sell in 2009?

Comments

[Moon Kil Woong:]

The inevitable result of bond oversupply is higher rates. It's simple supply and demand. You must offer higher rates to sell more if demand does not rise.

You'd think economists would be able to tell Geithner and Bernake (obviously not economists despite what they may say they are) the simple facts of Macroeconomics.

Thus Geithner's acts to lower rates will inevitably mean higher rates for everything ergo inflation. Seeking Alpha posters have been correctly pointing out this fundamental fact for as long as he has been in office.

Apparently, he is not listening.

Mar 26 05:22 AM

[kelm:]

I have been writing for some time that the massive volume of debt coming to market world wide would drive interest rates up and that if the Fed intervened and purchased Treasuries directly it would be a failure ultimately driving investors from our Treasury market. No savvy investor can feel safe buying into a market that is being manipulated and that is exactly what the Fed is doing. Can we really wonder at other nations, like China, being worried about their investments? Yes, they do take a long term view - that is where they are seeing the problems coming.

Geithner and Bernanke should see this but they are making some trade off that says this course is better than he alternative (depression?). I do not think Obama understands it to the degree he needs to though. I hate saying that but it is the conclusion I am coming to.

Mar 26 10:15 AM

[Tony Daltorio:]

The auction results should not come as a surprise to anyone. I would expect to see many more poor Treasury auctions in the future.

Mar 26 10:27 AM

[y3115y:]

When you print so much money and there is no demand, the price will fall.

Mar 26 01:24 PM

[Chris B:]

TBT has been good to me over the last few months, some recent volatility notwithstanding.

Interestingly, so has TIP.

Just a few weeks ago, commenters here were telling me these holdings were contradictory. That's when I knew I was on the right path.

Mar 26 02:08 PM

[Mr. Big:]

Weakening demand for US treasuries already? Boy...that was faster than I thought.

It's not just the $2.5 trillion in new issuances in 2009. The Fed's involvement is going to kill the demand for re-financings as well. That's what.....another $2.1 trillion this year (according to Bank of America).....

Who's dumb enough to buy in a bubble UST market?

Mar 26 03:51 PM

[vonryken:]

I think the "writing is on the wall"...we're going to defult soon, there will be a new reserve currency....and it will be totally the fault of the U.S. They look at our monetary mismanagment and are repulsed.
I'ts disgusting, and has become surreal. We're beyond redemption and there is NO bottom.

Mar 26 04:44 PM

[suppose:]

There should be a book, "Managing the Market" by Keynes, the Federal Governments, the Federal reserve, and the US Congress.
This would give the truth that none of these entities or anyone else can manage a National [or World]economy effectively for any sustained time. It is simply unmanageable, always has been, always will be.

Mar 26 06:05 PM

[mv1001:]

"This would give the truth that none of these entities or anyone else can manage a National [or World] economy effectively for any sustained time."

Hayek called this "The Fatal Conceit," the theme and title of his book dedicated to "socialists of all parties."

Too bad his writings are out of fashion amongst the power elite.

Mar 26 06:49 PM

[Drew R:]

Money is always and everywhere a monetary phenomenon.

I am continuing to hold TBT. The Fed will try to push down long-term rates, but ultimately they will have to pull back if it causes inflation or other buyers of Treasuries will be crowded out.

Drew

Mar 27 11:33 PM