September 13, 2012

AP Seems Stunned That Yesterday’s Auction of ‘Ultra-safe’ Treasuries Didn’t Go Well

Whoever wrote the Associated Press’s brief dispatch yesterday on the results of the government’s auction of 10-year Treasury notes seemed to be stunned and on the defensive about its result.

The item, entitled “Weak Demand at Auction of 10-Year U.S. Treasury Debt,” began as follows: “U.S. Treasury prices dived Wednesday after an auction of 10-year notes drew very weak demand, signaling a lack of appetite for ultra-safe investments.” Gee, I wonder why there’s a “lack of appetite”?

Well, it might have something to do with the fact that the world’s bond buyers don’t have unlimited funds. The national debt, which just crossed the $16 trillion mark, is up by over $5.4 trillion since President Obama took office. Given that the world’s total financial assets were about $200 trillion at the end of 2010, maybe investors are tired of reallocating their portfolios to U.S. treasuries to finance the Obama administration’s unprecedented spending sprees and fiscal deficits.

Then there’s the Federal Reserve, which is currently under pressure to engage in more “quantiative easing,” aka “continuing to throw sugar in the punch bowl regardless of the long-term consequences.” As of a week ago, the Fed held $1.645 trillion in treasury securities, or over 10% of the national debt. The graph at the just-noted link shows that its holdings have roughly doubled in the past nine months. It would thus appear that a “lack of appetite” for Treasuries by people not named Ben Bernanke is not a new phenomenon.

Finally, there’s the matter of whether characterizing Treasuries as “ultra-safe” and deserving of “risk-free” rates of return is still valid. After all, Standard & Poor’s downgraded U.S. debt in August 2011. Moody’s indicated earlier this week that it might do the same. After reaching a certain point, the higher the nation’s “public debt” to GDP ratio goes, the less “risk-free” its debt becomes. With that ratio at 72% ($11.3 trillion in “debt held by the public” divided by $15.6 trillion in annual GDP), maybe some potential investors have decided that Treasuries don’t deserve risk-free rates.

Cross-posted at


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