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Treasury Supply Surprises Market

Posted by Larry Doyle on June 18, 2009 1:34 PM |

Wall Street as an industry hates surprises. Whether it is expected earnings, economic data, or government information, Wall Street much prefers getting a sneak peek, positioning itself accordingly, and then profiting when news is actually released.

Well, Wall Street was surprised today with the release of the sizes of next week’s 2yr, 5yr, and 7yr Treasury auctions. The street expected the same sized auctions as May: $40 billion 2yr, $35 billion 5yr, $26 billion 7yr.

Bloomberg reports, Treasuries Fall as Reports Point to Growth, Debt Sales to Rise:

The Treasury will auction $40 billion in two-year notes on June 23, $37 billion of five-year debt the following day, and $27 billion of seven-year securities on June 25, the department said today. The total is $3 billion more than when the government last sold notes of similar maturities and the most since the U.S. began sales of this combination of maturities in February.

One may think that only $3 billion more than expected should not be a big deal. Well, not unlike a company missing earnings by .01 and having the stock plummet, the change in the size of these auctions is a lot more significant than merely $3 billion Treasury notes.

The larger auctions are an indication that tax revenues are less than expected, while spending is greater than expected. Additionally, if this round of auctions are larger than expected, Wall Street will ratchet up the expected sizes of future auctions as well.

How is the market responding?

Interest rates have backed up by 10-15 basis points across the curve. The 10yr note is back up to a 3.83% putting it once again near that 4% level. In my opinion, it is only a matter of time when the Treasury market breeches that level and stays above it regardless of what happens in the economy or equity market. Additionally, I expect mortgage rates will move above 6% and stay above that level as well.

Barack’s bond bus is working very hard to stay on the road, but as the government bond bubble is bursting under the weight of all this supply, the economy will have to work ever harder to regain its footing.


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