Friday, September 15, 2006

Tepid U.S. Treasury Auctions - Yields Climb

It would appear that U.S. Treasury auctions this week have caught the eye of the financial world.

What today’s auction means:

1. Treasury Yields (and therefore - interest rates) continue to move higher

2. Treasury prices are moving lower (bond prices always move inversely to yields)

3. Demand (especially foreign demand) appears to be weakening (Bid to cover)

4. The weak 5 year auction yesterday – does not appear to be a one-time event

All of this is not unexpected for a nation running massive budget deficits – and is forecasting massive deficits for the foreseeable future (there are some smart investors out there). Since we all know that we’re not fixing the deficit problem any time soon (see ‘universal healthcare’) – there is a high probability that the situation will worsen in coming weeks/months. If this situation continues to deteriorate to the point that a U.S. Treasury auction fails (bid to cover less than 2.00) – all kinds of unpleasant things will begin happening. Imagine all of our leaders in Washington D.C. (Republican and Democrat) trying to deal with a budget deficit of over $1 trillion – and no way to finance. If you think the majority of our leaders are inept now – just wait until we see a real crisis.

A few months ago – Chris Martenson targeted the end of March/beginning of April as the time he expected the next phase of this crisis to begin. There were a few reasons – but the main reason was that the Federal Reserve’s ‘program’ of supporting the housing market by buying Mortgage Backed Securities would end by April 1st. That program is ending as expected.

There is always the possibility that the Fed will step in with additional ‘programs’ to support the housing market and low interest rates – but most of the rhetoric I’ve listened to lately has been centered on removing government/central banking support from the world’s economy.

So – with the Fed ending massive programs ($1.25 trillion of MBS purchases & possibly ending Treasury purchases) aimed at supporting our housing market and low interest rates – and the U.S. Government continuing to flood the market with debt - the risk for higher interest rates is increasing significantly.

From an investment standpoint – we need to consider what higher interest rates could do:

1. What happens to an anemic housing market if mortgage rates increase significantly?
2. What happens to big ticket purchases (like cars) if rates increase?
3. What happens to stock markets if the flow of cheap money stops?
4. What happens to overall bank lending if interest rates increase significantly?
5. If bank lending continues to contract – what happens to our money supply?
6. If our money supply contraction continues to accelerate – what happens to our economy?

If you or someone you know is considering a purchase requiring a loan of any type – now is the time to make a decision.

jg - March 25, 2010
$32 Billion 7 Year Auction Closes At 3.374%, Very Weak Auction With Huge Tail

Submitted by Tyler Durden on 03/25/2010 12:04 -0500

• $32 Billion 7 Year closes at 3.374%, allotted at high 83.04%, previous at 3.078%!

• Bid To Cover at 2.61, Previous at 2.98, average overpast year 2.67

• Indirect Take Down 41.87; Direct Take Down 8.11%

• Indirect Hit Rate 82%

• When Issued was trading at 3.338%, a massive tail

• 10 Year about to break 3.90%

The chart says it all:


MARCH 25, 2010, 5:03 P.M. ET

Tepid Sale Weighs on Treasurys; 10-Year Yield Climbs

Wall St. Journal

NEW YORK—Prices of most Treasury notes and bonds were lower after relatively tepid demand on a sale of $32 billion in seven-year notes, sending the 10-year note's yield to its highest level since June.

The auction wrapped up this week's $118 billion new government note supply. Demand for this round of debt supply, including $44 billion in two-year notes and $42 billion in five-year notes, was weaker than in recent sales, underlining some concern that appetite for government debt could wane given the onslaught of debt supply to fund the high level of budget deficit and fiscal stimulus to revitalize the economy.

Without strong demand on auctions, bond yields could rise significantly, increasing borrowing costs for the U.S. government, consumers and companies. Already, fiscal problems in Greece have caused a downgrade in its sovereign credit ratings, increasing interest rates and undermining its economic outlook. Major ratings agencies have also warned the U.S. government that it has to address its budget shortfall to maintain its highly prized triple A credit ratings in the longer term.

"The weightiness of supply finally broke the camel's back," said James Caron, global head of interest-rate strategy at Morgan Stanley in New York.

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