Another Debt Record

The U.S. government will finish its historic streak of debt sales today with a record $16 billion offering of 30-year bonds. This will pile on top the $65 billion in 3-year and 10-year paper auctioned earlier this week, both records in their own right.

It’s worth noting that Monday’s auction for 3-year debt was met with ravenous, near-record demand and that Tuesday’s 10-year sale met a bid-to-cover ratio of 2.8… historically high for the 10-year, but not even close to the 3.3 ratio for the shorter dated bonds the day before.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

“A failed auction for U.S. Treasuries, looking out over the next couple of years, is not out of the question. If this happens, conditions in the interest rate derivative market, with a notional value in the hundreds of trillions of dollars, could get ugly fast. The question then becomes: who bails out the federal government? The Fed’s printing press could be cranked into overdrive, but if holders of dollars look to get rid of them as quickly as they’re created, this sort of policy route will losing its potency over time.

“The market may force the Fed to defend the dollar with interest rate hikes. This is type of currency crisis, in which Fed tightening comes earlier than expected, is totally outside of consensus expectations. An imminent financial crisis was also far outside of consensus expectations in early 2007.”