Investors are increasingly reluctant to step up and buy long-term Treasuries. The proof is in the results from yesterday’s sale of $25 billion in 10-year notes and today’s sale of $16 billion in 30-year bonds.
Today, the bonds were sold at a yield of 4.72%, versus pre-auction talk of 4.687%. The bid-to-cover ratio was just 2.36, compared with an average over the last 10 auctions of 2.48. Indirect bidders took down just 28.5% of the auction, compared to a 10-auction average of 43.2%. These results are simply awful.
Yesterday, the 10-year note auction also went over like a lead anchor. Only 33.2% of the notes went to indirect bidders. The average over the last 10 auctions was 39.3%. The bid-to-cover ratio was just 2.67, down from 3 at last auction and a 10-auction average of 2.76. Also, the yield at the sale was 3.692% vs. a 3.68% pre-auction forecast.
This is precisely what I’ve been warning about. The debt and deficit crisis that has already struck countries like Portugal, Greece, and Spain is inevitably going to make its way around to larger countries like the U.K. and the U.S. The simple reason? We face similar problems with massive debts and massive deficits.
In other words, stay the heck away from long-term Treasuries!
{ 4 comments… read them below or add one }
What length of term treasuries are not to be avoided? E.g., SHY (1 to 3 yr fund) or longer or shorter?
Mike Larson Reply:
February 11th, 2010 at 2:10 PM
I wouldn’t worry about an ETF like SHY. Maturities of around 2 years or less aren’t a problem. The further out on the curve you go, the worse the potential damage. In other words, 5s are riskier than 2s. But 10s and especially 30s are much, much more dangerous. Hope that helps.
The one factor that is missing, in my opinion, is the quantitative easing. Fed could buy all the bonds and notes if no one else is buying hence preventing the rates from going up. I don’t see you talk about that aspect. I’m willing to buy shorts like TBT but I’m alwasy wondering what if the Fed buys Treasuries in case no one else is interested. What would prevent the Fed from doing that? Please sure your thoughts.
Thank you,
Kamran
Hello Mike.
So you are very negative about long term treasury bonds, but they continue to climb. They have become the de-facto safe haven with all of the debt problems in Europe as well as a declining stock and commodity market. What catalyst should we be looking for so that we can sell our bonds for a nice profit? Yes, I am asking you “time the market”, but hey that’s what business you are in, right?
Andrew
Hi Mike; Thanks for all the great insight of the debt market. You have written many times about the potential for failed government bond auctions. Here is an article I found on the web and wanted you to see it. Thanks for your great work!!!! Jim
http://www.businessinsider.com/candy-from-strangers-who-exactly-is-buying-all-that-treasury-paper-2010-8