Treasuries: A $40 Billion Auction
The government just successfully brought $40 billion of 2 Year Notes to the market, in the largest such auction in history – with the highest bid/cover ratio (2.69) since fall 2007 and a yield of 92.5 bps or 1.4 bps lower than anticipated by traders surveyed by Bloomberg, but markedly above the 88-89 bps range the when-issued notes where trading in. In reaction to the strong bid/cover ratio, Treasury prices are rising again.
So people are still buying Treasuries. That’s good news for the US, but I’m still worried about current price and yield levels especially given the increasing supply of bonds. To provide visual context to some previous posts about the Treasury bubble question, I am posting historical yield charts below. Take note of the previous record low yields (during the period of 1977 through the end of 2007) and the recent historical average yields since January 1990, which exclude the years of extraordinarily high interest rates in the early 80s.
90 day T-Bills: currently in the 10-20 bps range after having dipped into negative territory in December
2 Year Treasury Notes: trading below 1% while the recent historical average is 4.7% (since Jan 1990)
10 Year Notes: more than 300 bps below recent average levels (1990-2009)
30 Year Treasury Bonds: prior to 2008, the long bond had not dipped below 4% in decades
While I have come across a number of solid arguments for why Treasuries may actually be priced close to their fair value today, what comes to mind when I look at the above charts is “mean reversion.” What part of the puzzle am I missing, or what piece of data am I not paying enough attention to?