Treasury Bond Auctions Met with Stronge Demand; Rates May Be Low for Years

This week the US Treasury Department auctioned off $70 billion in debt and it was met with eager demand. Yesterday, Sept. 10 investors bid for 2.92 times the amount of securities offered at the $12 billion sale of 30-year Treasury bonds. This is the highest so-called bid-to-cover ratio for that maturity since November 2007, the Treasury said.

Many believe this is a sign that interest rates are poised to stay low for the foreseeable future.  According to a Bloomberg article:

"Fixed-income investors can’t see a recovery strong enough to spur central banks to raise interest rates anytime soon, especially with the Obama administration forecasting that unemployment in the U.S. -- the world’s largest economy -- will rise above 10 percent in the first quarter."

The betting is that the Fed will keep rates low for the next couple of years. Yesterday, Fed Vice Chairman Donald Kohn said that a “large and rapid rise” in short-term rates is is unlikely because of slow or no worlwide economic growth and the lack of inflation. 

Still there is reason to be cautious. The government's spending is expected to escalate over the next year as the Treasury sells even more bonds to finance the projected $1.85 trillion deficit.  At that level, the deficit represents approximately 13% of the entire country's GDP according to the CBO. That's a truly staggering number. Past deficits have always been in the 4-7% range.

As the Fed stops buying Treasuries through its quantitative easing programs, the amount that must be absorbed by the market will grow from approximately $50 billion to $200 billion.

Whether that supply will swamp demand and macro-economic factors remains to be seen.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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