By David Silver
This was a big week for debt issuing, with the government offering $44.0 billion in two-year notes, $42.0 billion in five-year notes, and $32.0 billion in ten-year notes. All of the auctions were severely underbid, with the seven-year notes only having a bid-to-cover ratio of 2.61, which was the weakest in nearly a year. Overall bidding at the latest five-year auction was the lowest in six months. The auction's bid-to-cover ratio was 2.55, down from 2.75 at the February auction. Indirect bidders, which include foreign central banks, bought only 39.7% of the five-year notes offered. This was the smallest percentage this group had purchased since July 2009. The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold. The $118.0 billion of debt was clearly more than there was demand for as weaker economic data, the problems with Greece, and the $980.0 billion healthcare plan all weighed on the market's expectations.
The Treasury yield is commonly used as the risk-free rate in many financial formulas, but right now corporate debt is being seen as less risky than that of our government. Yields are at their highest levels since January, and risk moving even higher (as yields move higher, prices move lower). The Oracle of Omaha, Warren Buffett's, Berkshire Hathaway sold two-year notes to help fund its Burlington Northern acquisition, and the yield was a few basis points lower than that of a similar Treasury note. Proctor & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), and Lowe's (NYSE:LOW), also traded at lower yields in recent weeks. Through all this, Moody's said that America will use about 7% of taxes for debt payments in 2010 and almost 11% in 2013, moving "substantially" closer to losing its AAA rating. Basically, the market is saying enough with the deficit spending and would rather invest with corporations than with securities that have the full backing of the United States government.
Bonds sold by companies have returned 3.24% this year, including reinvested interest, compared with a 1.55% gain for Treasuries, Bank of America Merrill Lynch index data show. Returns exceeded government debt by a record 23 percentage points in 2009. It is not just corporations, but foreign governments as well. Investors demanded 0.60 percentage points more in yield to own 10-year Treasuries than German bunds of similar maturity, Bloomberg data show. A year ago, debt of Germany, whose deficit is 4.2% of its economy, yielded about half a percentage point more than Treasuries.