Treasury Auctions and Economic Cheerleaders

In the first of three rounds of money-raising scheduled for this week, the Treasury managed to sell $40B worth of full faith and credit debt instruments - of the two year variety to be specific. For those of you keeping track, today's auction leaves Geithner with only $64B more to raise..this week. The Treasury market reacted favorably to the auction, as the foreign central bank purchasers of this recent issue demanded less yield than expected. With two more auctions on the block this week alone, it might be a bit presumptuous for us to offer any sweeping generalizations as to what today's action may mean for the equity markets and overall economy. However, we will be quite interested to see how the economy's most loyal cheerleaders (the Obama administration, Wall St., and any others who stand to benefit politically or financially from economic optimism and/or public involvement in the US equity markets) react in the event that the week's remaining auctions are met with similiar enthusiasm.

The primary pattern of the past two months has been declining Treasury prices, rising Treasury yields, and rising stock prices. We have been told, constantly, that such price movements are to be expected in an environment where investor capital is rotating Out Of safe Government bonds, and Into riskier stock investments. Cheers have accompanied the confident assertion that we are "returning to normalcy". What then will be said once (if) the equity market begins to correct from it's overpriced peaks of this year, causing capital to re-enter the safer waters of the government bond market? With so many feet in so many mouths, something clever will have to be devised. The best one we can think of is something along the lines of inflation expectations having "moderated". Better yet, what about the following: Investors have grown increasingly confident that we have, more or less, seen the worst of the US economic recession. Rising Treasury prices reflect a positive outlook for the fiscal state of the US, and a recognition that the United States will be able to meet it's obligations with relative ease.

Although we find the usual patterns to be funny, we're not necessarily sure that they should be. Sphere: Related Content

Treasury Market Rebellion

Although we are typically not alarmed by short term market movements, we feel compelled to comment on today's developments in the Treasury market. As of the time of this writing, the yield on the 10-Year Treasury note has just surpassed 3.7%. Consequently, the average interest rate for a 30-Year fixed mortgage has climbed firmly above 5%, threatening to undermine a host of Government rescue schemes. We have been both surprised and impressed by the speed at which the yield on the 10-Year has been driven upwards-Surprised because we thought the process would take considerably longer to play out, and impressed at the Market's power in the face of a Federal Reserve intent on lowering the yield.

During the period of time in which the world financial system was supposedly on the brink of disaster, we were told that government intervention was required "at any cost". Well, it appears that catastrophe has been averted, but at what cost? Clearly, we think, the Market is judging (quite ruthlessly) the creditworthiness of the United States in the context of its ability to repay the obligations that it accrued, at an exponential pace, over the past six months.

Sphere: Related Content