Sunday, March 28, 2010

Treasuries Having Harder Time Finding A Good Home

It was inevitable.  You can't spray the world with an endless supply of something and not expect an adverse price effect.  The U.S. has been living on borrowed time, but now our bonds are looking square in the eye of the "Grim Reefer".  Country after country has either drastically curtailed buying our debt, stopped buying our debt altogether, or is looking for ways to offload it on someone else.

It's utterly amazing that nothing has happened... yet!  Now, the over-supply is creating a saturation in the market place, whose consequences have yet to be felt.  Another week, another financial problem.  That's what happens in a BEAR market:  whatever CAN go wrong, WILL go wrong!

For more than a year, analysts have been warning that record-sized debt sales by the U.S Treasury were utterly inconsistent with a 10-year yield below 4%.  This past week, the yield on 10-year notes jumped from 3.65% to as high as 3.92% on Thursday.  On Friday, it was 3.87%.

Tame "reported" inflation, rising unemployment, the housing market slump, the Federal Reserve’s policy of a virtually zero Fed Funds rate and its purchase of up to $1.7 trillion in bonds have all helped keep Treasury yields near historic lows.

But, this week the mood sharply deteriorated as yields for $118 billion of newly-issued U.S. debt were much higher than forecast, sparking overall selling of Treasuries.  Sentiment also deteriorated in the U.K. bond market after the government’s proposed budget failed to resolve doubts over future spending and debt reduction.

It hasn’t helped that the U.S. announced a big overhaul of its healthcare system this month, adding to worries about the scale of U.S. spending.  Thank you Obamacare! (sarcasm intentional!)

Also un-nerving U.S. investors this week was a report by the Congressional Budget Office that falling payroll taxes, resulting from high unemployment, means that Social Security will pay out more in benefits than it receives for this fiscal year.

“A sustained rise in yields is upon us and bond funds will start to incur losses,” says Jim Caron, Global Head Of Interest Rate Strategy at Morgan Stanley.  He expects 10-year yields to reach 4.5% in the second quarter, as investors pull their money from bond funds.  March looms as the first month for negative returns for investors in Treasuries this year.   Year-to-date, Treasuries have returned a scant 0.7% and threaten to slip into negative territory.

The 10-year note’s yield rose 15 basis points, or 0.15% , to 3.85%, according to BGCantor Market Data. The price of the 3.625% note due in February 2020 fell  $12.19 per $1,000 face amount.

The increase in the yield was the biggest since an advance of 0.27% for the week that ended Dec. 25.  The yield touched 3.92%  on March 25, the highest level since June 11.  The two-year note’s yield rose 0.05% to 1.04% and reached 1.12%  this week, the highest level since Jan. 4.

Unfortunately, the unsatiable appetite to fund America's bloated budget can only get worse.  The world has had it with our fiscal irresponsibility and the era of low interest rates will become harder to sustain. 

Marko's Take

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  1. Thanks for the tip....I'm sure readers are looking for ways to profit from higher rates!



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