The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.
The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to- cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.
Riiight. The entire world collapsed around us last year, if you haven’t been paying attention. The threat of sovereign defaults in Europe, a monster earthquake and tsunami in Japan and the beginnings of a collapse in the credit and equity bubble in China. When all the other hookers have AIDS, crabs sounds pretty darn good!
I think it’s reasonable to assume that Obama will misinterpret this as some sign of stability, of course. It’s easily done. And if it happened it would be disastrously wrong.
“If the last two weeks are any indication of how next year will start, there’s near-insatiable demand,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at the auctions, said in a Dec. 21 telephone interview. “We have a significantly shrinking supply of risk-free assets in the world and U.S. Treasuries are one of the few left.”
Ira forgot a few things, the most-important of which is that the only way you actually make money sitting in a zero-interest bond is if the market itself is in deflation.
Now if you’re trading long-term bonds you of course make money when the price goes up and the yield goes down. But zero is a floor, and we’ve been there — and the real monster “demand” has been on the short end of the curve. There’s no “profit” to be made holding 4 week bills – they’re simply a place to park cash where you’re reasonably sure it will still be when the bond matures.
There hasn’t been a problem with that of late, has there….. at places like…. oh…. MF Global?
Don’t fall for this as an indication of anything other than abject fear, and don’t misinterpret this as something “good.” Financial repression irrespective of the cause is bad, as it is lending of capital at a real rate of return that makes lending at all worthwhile.
Until rates normalize and so does the curve there is nothing “normal” being implied or demonstrated in the bond market — rather, what we have here is an indication of severe stress in funding markets overseas, with zero expectation that the Europeans are going to to manage to find their way out of the corner they’ve painted themselves into.