Treasury Debt Auctions Hardly Indicate America Should Fear Debt Overhang

For the first time I can remember CNBC now makes a point to report the final results of each and every new auction of Treasury debt. I guess now that many of the channel’s anchors have morphed into political commentators (from non-partisan financial reporters) they seem to think our currency is a crucial issue. Count me as one who thinks the hype over our country’s debt load and the volatile trading in the U.S. dollar is quite overblown.

The U.S. dollar is a floating currency, which is a good thing because the market dictates the exchange rate, not politicians. While it is true the dollar has been quite weak over the last six months or so, the same people complaining about a weak currency also fail to mention that the dollar was the strongest performing currency during the six month period before that, during the depths of the credit crisis.

At any rate, there is one simple reason why the idea that the rest of the world is less interested in buying U.S. debt is wrong (at least so far) and it can be seen from the very data that the CNBC pundits have now become accustomed to reporting each time the Treasury auctions off more debt to foreign buyers. I am talking about the bid-to-cover ratio.

Each time the U.S. wants to sell new debt, it takes bids from all potential buyers and those bids are used to determine the final price for the paper. The bid-to-cover ratio is a simple statistic that tells us how strong the demand is for each new debt issuance. Throughout the entire year the bid to cover ratios for each debt auction have come in between 2 and 3. That means for each dollar of debt sold, there were bids for 2-3 times as much paper. Simply put, demand outstripped supply by a factor of 2-3 times.

There is no doubt that diminished demand for U.S. debt would result in fewer bids and therefore a lower bid to cover ratio. If the ratio fell to around 1.1 or 1.2 then one could easily argue that demand might not continue to exceed supply. However, we have seen nothing of the sort as of yet. That tells me that demand for U.S. debt remains strong and the dollar and debt doomsayers have little factual basis for concern.

Disclosure: No positions

Comments

[HunterGVL]

Do you work for Bernanke or Geithner? Your essay is based on fundamentals and the way the system 'should' work. Indirect buyers are simply Bernanke masked in a variety of ways. QE has not ended by any stretch of the imagination. There are now simply primary buyers acting like indirect buyers.....for the record. Maybe the European Fed is buying US Treasuries and we are buying theirs. Kind of a CDS for fools. And even if there really are indirect buyers like Russia and Singapore, they are just desperate to prop up the US dollar to keep their own economies afloat...how much longer can that last? You need look no further than the BLS bullsh#* stats to realize that Treasury Auctions stats are nothing, if not compromised. How can a US treasury auction actually fail? How can Bernanke let that happen? What action would he be willing to take to prop up the "IDEA and PERCEPTION" of a strong dollar? He will not limit his intervention until he has killed the dollar. His revelation will come much too late, both for the dollar and for our country.

2009 Nov 16 09:53 PM