Hoping for a rich uncle, part two

From the WSJ:

A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market.

For months, investors have focused their attention on the debt crisis in Europe, but there are signs the spotlight is turning to the ability of the U.S. to finance its own budget deficit.

This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year note sale Thursday.

The poor demand, especially from foreign investors, sent the bonds' prices sharply lower and yields higher. It lifted the yield on the 10-year note to 3.9%—its highest since last June, and approaching the psychologically important 4% mark. That mark has been pierced only briefly since the financial crisis in 2008.

Investors' response marked a big shift from auctions in recent months in which major foreign buyers, such as central banks, had snapped up Treasurys. It could spell trouble for the U.S. housing market; the rates on many mortgages are linked to the yield on the 10-year note.

The move up in its yield coincides with the impending end of the Federal Reserve's program to support the mortgage market. The Fed has bought $1.25 trillion of mortgage-backed securities, bolstering their prices and thus holding down their yields.

Concerns about the U.S. budget deficit are beginning to hurt the Treasury market, says Steve Rodosky, head of Treasury and derivatives trading at bond giant Pacific Investment Management Co. He says he is increasingly worried about the U.S. fiscal outlook. "The government needs to take real action rather than pay lip service" to addressing the fiscal problems.

In all, the U.S. government is expected to sell $1.6 trillion in debt this year, including the $118 billion sold this week.

VH: Those little green pieces of paper that the government pumps out is looking a lot less attractive nowadays. Helicopter Ben must be thanking his lucky stars that Greece came in to save his arse. BTW, the latest news on Greece is that the responsible E.U. countries and the American taxpayer (surprise!) via the IMF are going to float the spendthrift Greeks some moolah if it fails to pay its debt. This is going to get interesting.

Treasury yields are higher than Corporate yields. Opps!

From Bloomberg:

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”

This of course means that our government is having to sweeten U.S. Treasury bonds to investors in comparison to corporate bonds; I don't know what this means in the short run but it is disconcerting since the federal government has run the credit card to very high levels. Something to think about.