East Coast Economics

Treasuries: A $40 Billion Auction

with 3 comments

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

90 day yields

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?

[Constant maturity yield data is publicly available from the St Louis Fed. Auction data taken from the MarketWatch Bond Report and Bloomberg News.]


Written by eastcoasteconomics

January 27, 2009 at 2:13 pm

3 Responses

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  1. out of question, where are the arguments that t notes are trading at their fair value?

    I simply don’t see how a pseudo branch of the government can prop up their price, while they concurrently trade at their ‘fair value’


    January 27, 2009 at 6:59 pm

  2. What you are missing is demographics. The reason treasury (and equity) prices have been going up over the last, is that baby boomers have been busily saving for their retirements, the first generation to do so on this scale.

    You are right about mean reversion, and the reason is when they try to live off their pensions, prices will collapse. Same for equities. (Maybe this already happened).

    Takanobu Furukawa

    January 28, 2009 at 4:25 pm

  3. What comes to my mind is “who in the world is lending their cash to the US government for 30 years and only getting 3.3%”?

    There’s absolutely no way these low yields will last.

    I guess the silver lining is that it is conceivable the govt may be able to buy back their own debt at quite a discount in the future. They are smart to take advantage of the current low yields — kind of like selling equity when you know your company is massively overvalued.

    By the way … love the blog.


    February 17, 2009 at 6:33 pm

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