[Swiftwater Gazette] US Debt Becoming Sub-prime

[Brad Haslett]

You knew this was coming, but who would believe it would come so fast?
 Great Britain just had a treasury auction fail for the first time in
10 years.  US treasury yields are rising (buyers want more for their
risk).  The Chinese are moving to shorter and shorter terms and are
threatening to stop buying all together. Geithner basically agrees
with the Chinese one minute on the long-range value of the US Dollar
and then has to quickly back track to keep the dollar from falling any
further as Wall Street reacts to his comments.  No one is home at the
US Treasury Department and no one with any expertise wants to work
there. The POTUS makes a speech and "answers" 13 questions but says
nothing. Read the transcript, don't listen to it, read it!  The man
says nothing of substance.  There have been a few bright spots in the
economy and we may (emphasis on the may) be turning the corner.  But
then there is that issue of all this debt - the largest amount in the
history of the world, larger than ALL the debt combined from George
Washington to George W Bush. If that worries you, if you don't
understand it, you are not alone. It doesn't make sense to China
either. Forget the MSM figuring any of this out, they don't understand
business or finance and besides, they're too busy washing the
Messiah's feet.  We are sooooo screwed!

Brad

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Treasuries Fall on Supply Concern as Seven-Year Sale Looms


By Dakin Campbell and Susanne Walker

March 25 (Bloomberg) -- Treasury 10-year note yields rose the most in
more than two weeks after an auction of $34 billion in five-year notes
drew a higher-than-forecast yield, spurring concern record sales of
U.S. debt are overwhelming demand.

U.S. securities dropped even after the Federal Reserve today bought
$7.5 billion of Treasury notes, its first targeted purchases of U.S.
securities since the early 1960s. The five- year auction drew a yield
of 1.849 percent, higher than the 1.801 percent forecast in a
Bloomberg News survey of eight trading firms. The Treasury will sell
$24 billion of seven-year notes tomorrow.

“In light of all the supply that’s in the market it’s not a surprise
that yields have moved back up,” said Jeffrey Caughron, an associate
partner in Oklahoma City at The Baker Group Ltd., which advises
community banks investing $20 billion of assets. “You don’t want to
fight the Fed in this market environment. Even though there is
enormous supply, the Fed will do what it can to keep a cap on yields.”

The 10-year note yield rose eight basis points, or 0.08 percentage
point, to 2.78 percent at 4:40 p.m. in New York, according to BGCantor
Market Data. The price of the 2.75 percent security due in February
2019 fell 21/32, or $6.56 per $1,000 face amount, to 99 23/32.

Yields have now gained 24 basis points in the five days since the
Fed’s March 18 announcement it would buy Treasuries sent yields down
47 basis points, the most since 1962.

Five-Year Auction

The 30-year bond yield gained 10 basis points today to 3.73 percent,
while the current five-year note yield appreciated eight basis points
to 1.81 percent.

The bid-to-cover ratio, which gauges demand by comparing the number of
bids to the amount of securities sold, fell to 2.02 from an average
2.18 at the previous 10 sales.

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.

Fed Purchases

“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.”

‘Poor Communication’

The Fed joins central banks in the U.K. and Japan in extraordinary
purchases of government debt. U.S. policy makers announced the
decision last week to buy $300 billion of government debt in the next
six months along with a plan to more than double purchases of housing
debt to $1.45 trillion, hoping to reduce rates on home loans.

The dollar fell the most in almost a week against the euro on concern
Treasury Secretary Timothy Geithner supported a Chinese plan to blunt
demand among global central banks for the U.S. currency. The dollar
weakened as much as 1.2 percent to $1.3651 per euro, the biggest
intraday decline since March 19, before trading at $1.3601 at 4:20
p.m. in New York.

Geithner later affirmed the dollar’s role as the world’s reserve currency.

“The poor communication from the Treasury department has complicated
the market for Treasuries,” said Baker Group’s Caughron.

Failed Auction

The U.K.’s effort to buy government debt wasn’t enough to prevent
today’s failed auction of 40-year gilts, the first time that the
government failed to attract enough bids at a sale of debt since 2002.
Investors bid for 1.63 billion pounds ($2.4 billion) of 4.25 percent
notes, less than the 1.75 billion pounds offered.

“The failed gilt auction doesn’t bode well for Treasuries,” said
Michael Franzese, head of government bond trading for Standard
Chartered in New York.

Average 30-year fixed mortgage rates were about 2.29 percentage points
more than 10-year Treasury yields, versus 1.57 percentage points five
years ago. Mortgage rates declined to 4.98 percent in the week ended
March 19, according to Freddie Mac, the mortgage-finance company under
U.S. government control.

TED Spread

Treasuries lost 1.68 percent this year, according to Merrill Lynch &
Co.’s Treasury Master Index. U.S. debt was down 3.4 percent before the
Fed announced its purchase program last week.

The difference between what banks and the Treasury pay to borrow money
for three months, the so-called TED spread, widened to 1.04 percentage
point from 91 basis points on Feb. 10. It reached a two-month high of
1.13 percentage point on March 13. The spread averaged 36 basis points
in 2006 before credit markets began to decline the next year.

To contact the reporters on this story: Dakin Campbell in New York at
dcampbell27 at bloomberg.net; Susanne Walker in New York at
swalker33 at bloomberg.net
Last Updated: March 25, 2009 16:49 EDT