EXCERPTS:
"Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
The roots of the apparent debt market calm are clear enough. The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy. The very large contraction of private financing demand freed private saving to finance the explosion of federal debt. Although our financial institutions have recovered perceptibly and returned to a degree of solvency, banks, pending a significant increase in capital, remain reluctant to lend.
Beneath the calm, there are market signals that do not bode well for the future. For generations there had been a large buffer between the borrowing capacity of the U.S. government and the level of its debt to the public. But in the aftermath of the Lehman Brothers collapse, that gap began to narrow rapidly. Federal debt to the public rose to 59% of GDP by mid-June 2010 from 38% in September 2008. How much borrowing leeway at current interest rates remains for U.S. Treasury financing is highly uncertain.
The U.S. government can create dollars at will to meet any obligation, and it will doubtless continue to do so. U.S. Treasurys are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.
***
I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.
Showing posts with label Flight to Quality. Show all posts
Showing posts with label Flight to Quality. Show all posts
Saturday, June 19, 2010
Friday, May 28, 2010
Two-Year Notes Sold at Lowest-Ever Yield - WSJ.com
EXCERPT:
"The U.S. Treasury sold two-year notes with the lowest yield ever as global investors fled to the safety of U.S. government debt.
The $42 billion of notes were auctioned at a yield of 0.769%, beating the previous low of 0.804% in a November auction.
The low rates come at a fortuitous time for the U.S. government, which is seeking to fund a record deficit. Some investors are willing to overlook the new debt, preferring to buy Treasurys amid a growing crisis in Europe. Fears about escalating tensions on the Korean peninsula also drove investors to Treasurys.
"The combination of another country being thrown into the alphabet soup of nations possibly hit by spreading Greece contagion combined with North Korean threats overnight all are forcing a bid to the Treasury market," said Christian Cooper, senior rates trader in New York at Jefferies & Co.
"The U.S. Treasury sold two-year notes with the lowest yield ever as global investors fled to the safety of U.S. government debt.
The $42 billion of notes were auctioned at a yield of 0.769%, beating the previous low of 0.804% in a November auction.
The low rates come at a fortuitous time for the U.S. government, which is seeking to fund a record deficit. Some investors are willing to overlook the new debt, preferring to buy Treasurys amid a growing crisis in Europe. Fears about escalating tensions on the Korean peninsula also drove investors to Treasurys.
"The combination of another country being thrown into the alphabet soup of nations possibly hit by spreading Greece contagion combined with North Korean threats overnight all are forcing a bid to the Treasury market," said Christian Cooper, senior rates trader in New York at Jefferies & Co.
Saturday, November 28, 2009
Treasurys Rally on Dubai Trouble - WSJ.com
"Treasury prices rallied Friday and the market posted a weekly gain, as investors dumped stocks and commodities and sought safety in low-risk government debt amid worries about the unfolding debt problems in Dubai.
The safe-haven flows added to demand for Treasurys .... Investors at home and abroad snapped up this week's record $118 billion in sales of two-year, five-year and seven-year note supply, allowing the U.S. government to easily fund its budget shortfalls.
Friday, the 10-year Treasury note was up 21/32 point, or $6.5625 for every $1,000 invested, to yield 3.202%, down from 3.279% Wednesday as bond yields fall when prices rise.
The two-year note, a haven in times of uncertainty, was up 4/32 point to yield 0.687%. It touched an overnight low of 0.609%, close to the record low of 0.601% set on Dec. 17, 2008.
In the scramble for safety, rates on four Treasury bills maturing in January 2010 traded around negative 0.01% Friday, dipping below zero for the second time since last week. That means investors were willing to forgo the chance of earning interest and take a small loss instead to get their hands on bills—government securities of less than a year's maturity that are sold at a discount. These are typically seen as the safest types of securities."
The safe-haven flows added to demand for Treasurys .... Investors at home and abroad snapped up this week's record $118 billion in sales of two-year, five-year and seven-year note supply, allowing the U.S. government to easily fund its budget shortfalls.
Friday, the 10-year Treasury note was up 21/32 point, or $6.5625 for every $1,000 invested, to yield 3.202%, down from 3.279% Wednesday as bond yields fall when prices rise.
The two-year note, a haven in times of uncertainty, was up 4/32 point to yield 0.687%. It touched an overnight low of 0.609%, close to the record low of 0.601% set on Dec. 17, 2008.
In the scramble for safety, rates on four Treasury bills maturing in January 2010 traded around negative 0.01% Friday, dipping below zero for the second time since last week. That means investors were willing to forgo the chance of earning interest and take a small loss instead to get their hands on bills—government securities of less than a year's maturity that are sold at a discount. These are typically seen as the safest types of securities."
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