Bond Bubble Burps Again

The bond vigilantes have spoken. They’ve cried in a powerful chorus, “Ehhh… we’re a little annoyed.”


The much-hyped 10-year note auction Wednesday got a lukewarm reception from global buyers. As you can see, when the auction began at 1 p.m., investors quickly demanded a 4bps hike in the underlying yield — according to Morgan Stanley, the biggest markup at an auction’s outset since May 2003.

That helped bump the yield on the 10-year as high of 4.0%, its highest since October. Traders definitely made themselves heard — worries about debts and deficits in the U.S. are back in the spotlight. But we wouldn’t say it was in renegade vigilante fashion. 4% is a point of historic buying support for the 10-year… it’ll capture our interest again when that level is tested.

And what a coincidence… the very day of this highly anticipated bond auction, Russia and Brazil both announced they’d soon be selling $20 billion in U.S. Treasuries in exchange for IMF bonds.

It’s a smart move…each nation gets to diversify out of the dollar (the IMF will pay these bonds back with a basket of global monies) and send a clear signal to the U.S. government. But their leaders can hide behind altruistic intentions: “This support is important to help end the international financial crisis,” said Brazilian finance minister Guido Mantega. Since the money will go to the IMF’s emergency fund, Brazil and Russia get to look like generous, globally cooperatave players…even if their only intention is to get the hell out of U.S. Treasuries.

Coupled with India and China’s recent call to sell U.S. bonds for IMF paper, that’s $80 billion in U.S. debt to be sold…just what the struggling market needs.

Look for more bond turbulence today: The Treasury will spew $11 billion in 30-year bonds, another auction likely to elicit an unpleasant response. Attentive bond observers will recall last month’s long bond auction, which was given a “dismal reception,” in Reuters’ words. Since then, yields on the 30-year bond have climbed as high as 4.83%, its highest level since October 2007.