Yikes — did you see that intraday chart on the long bond futures? Nasty! The government just sold $14 billion of long bonds at a whopping 4.288% yield. That was far above pre-auction forecasts for a yield of 4.192%, according to Bloomberg. The bid-to-cover ratio came in at just 2.14, compared with a 10-auction average of 2.24 and a last auction showing of 2.4. Only 33% of the bonds sold to indirect bidders. That was above the 26.1% average of the last 10 auctions, but well below the 46.2% reading at the last auction. At last check, LB futures were off 1 29/32 after trading weak earlier in the session. Ten-year yields are shooting up 11 basis points to 3.3%.
And don’t let anyone tell you no one saw this coming either. Here is my analysis from early December, in which I said that the Treasury market was well into bubble territory and that a “day of reckoning” was fast approaching.
{ 8 comments… read them below or add one }
What does bid to cover ratio mean? And how does this effect stocks?
Mike Larson Reply:
May 7th, 2009 at 4:45 PM
The term “bid to cover ratio” is simply a measure of demand for the bonds on auction. It measures the dollar volume of bids for the bonds against the dollar volume of bids being sold. For instance, if Uncle Sam was selling $1 million worth of bonds, and there were bids for $1.25 million, then you would say the bid to cover ratio was 1.25-to-1. The higher the ratio, the more demand there was for the auction. So when the bid-to-cover is low relative to recent auctions, it’s a sign demand for bonds is weaker. And when you get a weak bid-to-cover ratio along with a much higher-than-expected yield on the new bonds, it tells you buyers are NOT bidding aggressively. Higher rates were a clear negative for stocks today.
The UK had problems selling bonds, too, a while back. With all the bail out money the world has issued recently, what are the chances that this becomes a world wide trend? It would send interest rates much higher?
Mike – firstly well done; you are about as right as a commentator can be and your writing has been both educational and helpful. How, however, can you make this observation about long bonds and, simultaneously, todays article about a tentative residential housing recovery. Is there not an inverse relationship between interest rates and house prices? Being English I have seen wild oscillations in housing markets and ALL of the drops have been triggered by interest rate hikes. The latest global plunge is the exception – the boxer languished on the ropes before a punch was thrown. Bursting the treasury bubble will pulverize all asset prices by raising the cost of capital. Have we forgotten that 5% mortgages are way below trend?!
Does the market ever get like a .95 – 1 ratio? What would happen?
Aloha Mike
Reading your message today about housing and then this blog interest rates going up. What will that do to housing next year and the years to follow? Especially if we repeat history. I mean since the fed is buying our own bonds because China is not. Will that drive interest rates up to the 80’s interest rates? Into to the teens?
Thank You
Ron
Mike Larson Reply:
May 8th, 2009 at 2:48 PM
While I believe interest rates are going to head up, I am not looking (for now) for double-digit levels. What has been going on lately is that even as Treasury rates have risen, mortgage rates have hardly gone up at all. Instead, the spread – or difference — between mortgage rates and Treasuries has compressed. That will change soon as I expect both sets of rates to rise from here on out. But other forces are also acting positively on the housing market (plunging new home inventories, tax break, etc.). that’s why I’m simply less bearish/neutral after being a raging housing bear for four years.
Thank you.
Where can I follow the spread of: 1 ) Mortgage interest rates –
versus: 2 ) 30-year T-bond interest rate ? Thank you.
rnash
Mike Larson Reply:
June 3rd, 2009 at 1:00 PM
You can get data on 30-year bond yields from the Federal Reserve: http://www.federalreserve.gov/releases/h15/data.htm
You can get mortgage rate data daily from bankrate.com (http://www.bankrate.com/) or weekly from Freddie Mac (http://www.freddiemac.com/pmms/). You’ll need to construct your own graphics using Excel or a similar program. Good luck.
Why is the treasury 20 yr. interest rate going down as the market is going up?
I am getting hurt on TBT which is 2x interest rate change, what do you think?
Concerned that if the interest rate goes down with the market up what will happen if the market goes down?