Interest Rate Roundup

Thursday, February 11, 2010

Another ugly Treasury auction!

Investors are increasingly reluctant to step up and buy long-term Treasuries. The proof is in the results from yesterday’s sale of $25 billion in 10-year notes and today’s sale of $16 billion in 30-year bonds.

Today, the bonds were sold at a yield of 4.72%, versus pre-auction talk of 4.687%. The bid-to-cover ratio was just 2.36, compared with an average over the last 10 auctions of 2.48. Indirect bidders took down just 28.5% of the auction, compared to a 10-auction average of 43.2%. These results are simply awful.

Yesterday, the 10-year note auction also went over like a lead anchor. Only 33.2% of the notes went to indirect bidders. The average over the last 10 auctions was 39.3%. The bid-to-cover ratio was just 2.67, down from 3 at last auction and a 10-auction average of 2.76. Also, the yield at the sale was 3.692% vs. a 3.68% pre-auction forecast.

This is precisely what I’ve been warning about. The debt and deficit crisis that has already struck countries like Portugal, Greece, and Spain is inevitably going to make its way around to larger countries like the U.K. and the U.S. The simple reason? We face similar problems with massive debts and massive deficits.

In other words, stay the heck away from long-term Treasuries!


  • The common wisdom seems to be inflation is coming and long treasuries a bad bet but that's no way to trade because we are not through this deflation; i.e., the price level is still declining (main CPI index peaked in July 2008 and stands 2% lower today) which means dollars are worth more relative to domestic assets such as real estate now than then.

    Furthermore it is beginning to look like the deficit/debt scaremongering is really taking hold which means the probability of lethal policy mistakes including real spending cuts (not just the politically attractive kind) is increasing; i.e., this deflation could be pushed (not slid) into a full depression which would naturally make long federal bonds the most attractive of all financial assets.

    Frankly if I really believed inflation was coming soon I'd have no problem with increasing debt since the leverage could be paid back in cheaper dollars but I don't believe it so buying debt remains preferable even if it is less (immediately) profitable; considered as insurance it is still cheap at these levels and worth risking some opportunity cost at the very least.

    By Anonymous RW, at February 12, 2010 at 8:21 PM  

  • I'm wondering if you would consider allowing links to your posts, e.g. where clicking on the title would bring up this specific post, such that it could be linked to and referenced?

    By Blogger SF Mechanist, at February 14, 2010 at 11:16 AM  

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