One basis point, or 0.01 percentage point, spread over $171 billion -- the amount the Treasury said it may borrow this quarter -- represents $17.1 million in interest.
Traders refer to yields that are higher at auction than typically forecast as a tail. The Treasury's July 22 sale of 20- year Treasury Inflation Protected Securities, for example, drew a tail of 5 basis points, or 0.05 percentage point, according to RBS Greenwich Capital in Greenwich, Connecticut.”
With all sources of tax revenue, from corporate profits to residential property taxes and retail consumption taxes, and with government obligations sky rocketing as bailouts and stimulus packages are crafted, expect some of the largest deficits in U.S. history.
“The paucity of primary dealers coincides with the largest borrowing requirement in American history and the acknowledgment by the administration of President George W. Bush that the U.S. will finance a budget deficit totaling a record $482 billion next year. When the dealer system began 48 years ago with 18 firms, the U.S. had a $300 million surplus. The group has shrunk from a peak of 46 in 1988.”
Most important are
INDIRECT BIDDERS.
“The Treasury this week will sell $17 billion of 10-year notes in its quarterly sale of the securities, the most since 2003. It will also auction $10 billion of 30-year bonds, the most in two years. The government said July 30 that it's considering more frequent auctions of both securities, and will announce a decision in November.
Dealers are just one category of participants at auction and a smaller number doesn't automatically doom the government to higher rates or guarantee profits for firms.
Indirect bidders, a class of investors that includes foreign central banks, bought 27 percent of the two-year notes that sold in the past year. That compares with an average of 34 percent in the preceding 12 months.”
The rest of the world has financed the U.S. lifestyle. It does look like they are less able or less willing to do so now. The effect on interest rates could be catastrophic.
The era of low interest rates in the U.S. may soon be over…
U.S. Treasuries Decline Before Auctions of 10-, 30-Year Debt: “Treasuries declined as some traders speculated last week's rally was overdone given the U.S. government's plan to increase sales of long-term securities and investors became more bearish on the debt.
The decline pushed the yield on the 10-year note up from near the lowest level since July 17 before the U.S. sells $17 billion of the securities on Aug. 6, the largest amount since 2003. It will also auction $10 billion of 30-year bonds the next day, the most in two years. An index of sentiment showed investors were bearish on Treasuries for a fourth week.
“There's a lot supply coming this week and the market may well find it difficult to digest it all,” said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “The market is looking increasingly vulnerable at these levels.””
