Today the treasury is selling $124 billion of short term debt including one longer term 2 year note of $44 billion.
By Daniel at 28 December, 2009, 2:17 pm
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4 wk Bill 12/29/09 23B
13 wk Bill12/28/09 28B
26 wk Bill12/28/09 29B
2 yr Note 12/28/09 44B
5 yr Note 12/29/09 42B
7 yr Note 12/30/09 32B
http://www.treasurydirect.gov/RT/RTGateway?page=institMktbles
Interest rates on all treasuries have been moving up significantly for two weeks or more resulting in a yield curve of the steepest in history. Normally in years past and before the present officials in congress, white house and fed, such a steep curve would mean significant economic growth in coming quarters, but this time it may be different because of several important factors.
http://www.bloomberg.com/markets/rates/index.html
1) First factor is the amount of deficit borrowing by the White house and extended by congress where the deficit/spending is more than 42% and growing. The idea of Obama and democrats in congress is they can increase spending faster than growing debt consumes revenues. But this has never worked in the history of any nation.
2) Second reason for this time it is different on interpretation of steep yield curve is, that never has the US government ever been in the middle of massive QE by the Fed while most of the increase in debt sold by treasury being mostly in short term. This presents an almost impossible scenario of the Fed trying to withdraw liquidity while at same time the treasury tries to move short term debt to the long term. This is reason the Fed has said that interest rates will remain low for extended period of time and not so much because they believe the economy needs stimulation but because they know that withdrawing liquidity in this situation is counter subject to national objectives, whatever they may be.
3) There are many additional reasons for this time it is different themes. One being that the debt level is so large and growing so fast that foreign buyers can not extend capital fast enough nor are they likely to do so faced with thinning of dollars accumulated from trade. Also dollar strength today is counter objective for treasury investments from perspective of reasons for the strength being mostly due to weakness in Europe and not from any perceived strength in the US.
We can expect treasury rates to continue increasing which will neither increase GDP growth nor increase value in dollar over the next 12 months, but actually result in the opposite.
- koot
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