Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Crumbling U.S. Treasury Bond Market Suggests Spike in Interest Rates 2010

Interest-Rates / US Bonds Dec 18, 2009 - 10:22 AM GMT

By: Mike_Larson

Interest-Rates

Best Financial Markets Analysis ArticleThe holiday season is here — and in just a couple of weeks, 2009 will fade into the history books. I truly hope that you and your family enjoy these happy times.

But before I sign off for the year, I feel obligated to address one of the biggest threats to your wealth that’s looming in 2010. I’m talking about the very real prospect of “failed” Treasury auctions, plunging bond prices, and a big spike in long-term interest rates.


We touched on this issue briefly a week ago. But this time, we’re really going to get our hands dirty!

The Warning Signs Are There. Please Don’t Ignore Them!

Each and every week, the U.S. government sells Treasuries to fund its operations. Four-week bills. Three-month bills. Six-month bills. One-month bills. Two-, 3-, 5-, 7-, and 10-year notes. And of course, the granddaddy of them all, the 30-year Treasury Bond.

The Treasury auctions offer those securities to all kinds of bidders — individual investors, banks, insurers, pension funds, mutual funds, and foreign central banks are among them.

The more aggressive the bidding, the lower the yields Treasury has to pay on the securities it sells. And the lower the yields, the lower the U.S. government’s financing costs.

When buyers are aggressive, Treasury can  get away with paying lower yields.
When buyers are aggressive, Treasury can get away with paying lower yields.

For a while, the Treasury Department was able to sell almost anything and everything at rock-bottom yields. It didn’t matter if it was the shortest of short-term bills or the longest of long-term bonds. Investors were willing to pay up. That helped keep our cost of borrowing low and underwrote the massive deficit with little-to-no financial pain.

But now that’s starting to change.

Slowly but surely, investors are beginning to appreciate the seriousness of the dangers we highlighted many months ago. All the mega-bailouts … all the Fed money-printing … all the fiscal recklessness being practiced by both Democrats and Republicans alike are starting to spook bond market players.

Sure, they’re still buying very short-term Treasuries like mad. It’s not like the government is going to default tomorrow, or that inflation is going to surge overnight. But auctions of 10-year and 30-year bonds are getting progressively worse, with demand dropping as supply ramps up …

Weak Auctions a Prelude to Failed Ones?

One key measure of auction strength is the “bid-to-cover ratio.” This measures the dollar volume of bids versus the volume of Treasuries being sold. The higher the number, the more demand you have relative to supply.

At the last 30-year bond auction, held on December 10, the bid-to-cover ratio came in at 2.45. That was substantially below the recent peak of 2.92. The 10-year note auction, held one day prior, registered a ratio of 2.62. That too was sharply below the recent high of 3.28.

Another way to gauge auction strength is to see who’s doing the buying …

The number of central  banks buying Treasuries has declined drastically.
The number of central banks buying Treasuries has declined drastically.

If you have a high percentage of notes and bonds going to so-called “indirect bidders,” you can breathe a sigh of relief. That’s because important buyers like foreign central banks fall into that category, and we desperately need them to step up to the plate to keep rates low.

Unfortunately, the numbers don’t look good there, either. Indirect bidders only took down 40.2 percent of the 30-year bonds sold in mid-December. That was down from the 2009 peak of 50.2 percent in July. Their share in the 10-year auction was even worse — just 34.9 percent. As recently as September, indirect bidders were snapping up 55.3 percent of the notes being sold.

Bottom line: Long-term Treasury auctions are getting weaker and weaker.

We haven’t seen a so-called “failed” auction yet. That’s when the bid-to-cover ratio drops below 1 — meaning the government can’t even get $1 in bids for every $1 in securities being sold. But that has already happened in the U.K., and I believe it’s only a matter of time before it happens here.

Defensive Measures to Take …

If you’re a defensive investor, your course of action is simple: Avoid long-term Treasury debt. Don’t put in bids for long-term notes and bonds via the Treasury Direct system or through your broker, and consider selling whatever long-term holdings you already own.

That strategy is one I’ve been advocating for a long time. And boy do I hope you’ve been listening! Just consider this: If you purchased the iShares Barclays 20+ Year Treasury Bond Fund (TLT), an exchange traded fund (ETF) that owns long-term Treasuries, at the end of 2008, you would have already lost more than 20.5 percent! That INCLUDES interest payments, by the way.

As a matter of fact, 2009 has been the absolute WORST year for total return on long-term Treasuries since at least 1973. That includes dismal years such as 1994 and 1999, which occurred during Fed rate-hiking cycles.

Until next time,

Mike

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Ron S.
19 Dec 09, 03:40
Thank you for explaining Treasuries!

There are many people, like myself, who have limited understanding of economics, and finance, in general. Details of how the Government finances it's expanding debt have been particularly hard for me to find. Your brief explanation regarding Treasuries and the auctioning process is one of the best I've read, anywhere. Thank you so much.

Ron S.

Spokane, WA


Post Comment

Only logged in users are allowed to post comments. Register/ Log in