The Yield Spike Everyone Is Expecting

Since everyone is expecting it, maybe it won't happen?

Any insecurity about the US government's imminent fundraising capacity should be resolved, now that the 7 year note auction is complete. While direct bidders (foreign central banks?) were a record part of the competitive bid (17.2%), US Treasury managers can sigh in relief that the hard part of the week is over.

This week's auction was a beneficiary of a massive amount of debt rolling off mid-February (recall Feb 15th is a maturity day), around $130B (of the $180B total raised). Which of course means marginal extra treasury supply was only around $50B. But that is a twice a year benefit, and by no means is the Treasury going to witness smooth sailing going forward, as we have an upcoming 10 and 30 year auction of substantial size without the liquidity benefit of old maturing debt to roll over.

When the Agency MBS quantitative easing program finishes at the end of March, it would not be surprising to see the market try to find a new value (higher rates) for agency debt (also likely substantially affecting other debt of longer duration). On the bright side, those who were itching to get out of their agency positions have now had sufficient opportunity to do so (for one full year amidst $1.25T of purchases). Perhaps that means Pimco has nothing substantial left to sell into the market. Regardless, like we are watching the market testing the Euro over this Greek debt crisis, it isn't a wild improbability that a yield spike, perhaps temporary, will also be witnessed.

After this yield adjustment occurs, perhaps the "free" markets will have a better feeling for what yield area is safe for entry into long maturity debt. Because of this, perhaps the direct bid percentage (of much recent concern) of these auctions will fall. Again, I am still suspicious there if there is enough capital out there to soak up US Treasury demand at these yield levels. Thoughts?

$180 Billion Fundraiser

Was the Fed discount rate move an attempt to show discipline in the face of record supply coming to the market?

$26B 3 month bills
$28B 6 month bills
$44B 2 year notes
$42B 5 year notes
$32B 7 year notes
$8B 30 year TIPS

$180B Fundraiser in one week (Feb 22nd-26th).

I am very suspicious of the 5-7 year auctions' performance.

Good luck.