Uncle Sam is serving big portions, and investors may not have stomach enough. With $5.5 trillion of Treasury debt already out there, appetites may be sated. Still, the borrowing binge must continue, as new funds are needed for TARP, TALF, tofu, and whatever other menu options TurboTax Tim can cook up. “There is a lot of concern about who will be there at the end of the day to buy all this debt,” observes one bond trader, quoted at FT.com.When supply begins to overwhelm demand, higher interest rates are needed to bring dealers back to the table. Since the end of December, the yield on ten-year notes has climbed from 2.08 to 2.95%--and the 30-year bond from 2.68 to 3.70%--in anticipation of the U.S. Treasury's quarterly auction of $67 billion in long-term securities this week. In normal times, a rise in rates from such a low level accompanies an acceleration in economic activity. Not so now, as the economy continues to hemorrhage jobs (almost 600,000 lost in January alone).
Beyond a certain point, rising rates are unwelcome, choking further growth. The tentative progress made recently in refinancing home mortgages would probably stall, paving the way for further erosion in housing prices. The Federal Reserve has signalled that it may step in as a buyer of last resort of U.S. bonds, but only if "such transactions would be particularly effective in improving conditions in private credit markets," according to a statement released last week. For now the Fed would prefer to direct its firepower at consumer loans and home mortgages.
As already pointed out, private banks, faced with the prospect of rolling over $2 trillion in debt over the next two years, will be competing with the U.S. Treasury for the support of bond investors. All of these refundings must be absorbed in order for the system to avoid collapse.
[update, 11:00 a.m.--]
The yield on the 10-year note has just gone through 3%.
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