Toxic Treasuries Redux

While the equity markets are reacting positively to whatever bit of good news they can grab, economists are eying  the market for government bonds.  The United States and the United Kingdom have huge deficit driven budgets and stimulus plans that are testing the willingness of their creditors.  The US is skating on the thin ice.  The UK fell into the pond.  This from Market Watch:

NEW YORK (MarketWatch) — Treasury bond auctions, not usually the stuff that fires up equities traders, rocked stocks this week as investors homed in on worries about the ability of the government to borrow more than $2 trillion to fund its financial and economic rescue plans.

On Wednesday, concerns were sparked after the U.K. failed to get enough bids to sell the full amount of 4-year gilts it offered, the first time this happened in 14 years. Later in the day, a U.S. government auction of $34 billion of 5-year notes drew only tepid interest from foreign investors.

“Everybody knows that the government is auctioning stuff like there’s no tomorrow,” said Paul Nolte, director of investments at Hinsdale Associates. “The question is who’s going to buy all this stuff,” he said. “If there’s not enough buyers, interest rates will have to go higher, which means mortgage rates would have to go higher and that could derail any recovery we might have.”

Treasury bond yields, which move inversely to bond prices, are used to benchmark the interest rates on many consumer loans, including some mortgages. When buyers don’t show up at an auction, bond prices fall and their yields rise.

This brings us back to China and their call to review the dollar’s role as a reserve currency.  The offset on the Fed’s balance sheet to Treasury Bills and Bonds is dollars.   These things and the interest rates that prevail in the economy are causally linked.  You mess with one, you mess with them all.

Meanwhile, China, the largest buyer of U.S. Treasury bonds, expressed concern earlier this month about the safety of its investments. The massive amounts of U.S. debt issued have pressured bond prices and also threatened the strength of the dollar, which could further reduce the value of holding Treasurys.

China also rocked the boat when the governor of its central bank on Monday called for a new global reserve currency to replace the dollar.

The Treasury had announced that the would be heavily involved in the market this week.  The FED is also out there with its quantitative easing program.    Odd things are happening.   It became obvious by mid Wednesday that their announcements and actions were causing the Treasury to actually buy at  high price mid-morning then selling much later at a low price.  It doesn’t take a rocket scientist to know that’s bad math for the taxpayer.    Larry Doyle over at NQ heard that Wall Street was trying to sell three times the amount that the Treasury actually bought.

Bloomberg also noted the supply concerns.

The Treasury Department is selling a record $98 billion in notes this week, eclipsing the record $94 billion auctioned the week ended Feb. 27. The U.K. failed to attract enough bidders today at an auction of 1.75 billion pounds ($2.55 billion) of gilts for the first time in almost seven years.

President Barack Obama’s government is selling record amounts of debt to revive economic growth, service deficits, and cushion the failures in the financial system. Debt sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc.

Orders for U.S. durable goods unexpectedly rose by 3.4 percent in February, the Commerce Department said today in Washington. Purchases of new homes in the U.S. unexpectedly jumped in February, increasing 4.7 percent to an annual pace of 337,000 after a 322,000 rate in January, Commerce said.

“Better than expected economic data, failure of the long- end auction in the U.K. and low demand at the five-year Treasury auction; all these factors combined are leading to higher yields,” said Anshul Pradhan, an interest-rate strategist in New York at Barclays Capital Inc., another primary dealer.

The Fed said it purchased $7.5 billion of U.S. debt spread among 13 of the possible 19 securities eligible for purchase. The notes mature from February 2016 to February 2019, the Federal Reserve Bank of New York said in a statement today. Nearly $22 billion was submitted to the central bank in the first day of buying, the New York Fed said.

“We are really not seeing any kind of meaningful support for the Treasury market,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley’s individual investor clients. “Conventional wisdom in the market is that the Fed will concentrate on the five- to 10-year or the seven- to 10-year sector.”

Read the rest of this entry »