Rush on US bonds calm after a storm

Photo / Richard Robinson.

Investors scrambled to buy United States government debt at an auction of new Treasury bonds yesterday, helping to calm fears that the markets are running out of patience with the country's enormous deficits.

The Treasury sold US$29 billion ($37.8 billion) of seven-year bonds at an interest rate at the bottom end of the day's trading range, in spite of continuing shockwaves from a disastrous auction of a similar size a day earlier.

Debt auctions have assumed outsize importance to the mood of the markets, because US politicians have promised to tackle the country's rising national debt but continue to pass legislation that keeps tax rates low and pumps more borrowed money into the economy.

At the same time, the Federal Reserve has been battling to keep market interest rates low with its programme of quantitative easing, its promise to purchase $600 billion of Treasury debt - but rates have risen, not fallen, since the programme was instituted last month.

Yesterday's better-than-expected bond auction helped reverse Wednesday's sharp jump in interest rates. Minutes after the results of the sale were announced, benchmark 10-year Treasury notes were trading higher in price to yield 3.4 per cent, down from 3.49 per cent at the end of the previous day.

The US$29 billion of seven-year notes were sold at an interest rate of 2.83 per cent, compared with the forecast of 2.86 per cent in a Bloomberg News survey of dealers.

The results prompted a private sigh of relief among Treasury officials, rendering Wednesday's auction of US$35 billion in five-year debt as an aberration. The lack of demand from buyers meant the price the bonds fetched was lower and, therefore, the interest rate was higher than anyone on Wall Street had expected. Taxpayers will be paying 2.149 per cent interest on the new five-year debt, compared with the 2.103 per cent that was the market rate before the auction.

The sale was so poorly received - with a bid-to-cover ratio of 2.61 - that bond investor Bill Gross, known as the "bond king" for his expertise, labelled it "a stinker".

It triggered a new debate over the extent to which investors will be willing to finance government debt that has now reached US$13.8 trillion. The annual budget deficit is US$1.3 trillion and it's not forecast to ever fall below the 3 per cent of GDP level that economists have historically argued is sustainable over the long term.

Yesterday's return to normalcy suggested that the poor showing of the earlier auction was related more to the thin volume of trading, with market players absent because of the Christmas holiday and snow storms in the northeast.

A bond market sell-off earlier in the month had pushed the interest rate on 10-year debt over 3.5 per cent, frustrating the Fed's efforts to keep rates low. Treasury rates, particularly the rate on the benchmark 10-year bond, are used as the reference point for many other kinds of debt, including mortgage rates.

- Independent