It is always a bit of a head scratcher on why investors show
interest in owning treasuries and tend to shy away from stocks when
there is fear of U.S. government default on its debt. One
would think the asset that might not get paid or be impaired
(treasuries) would perform poorly relatively to the asset that is
actually run in an investor friendly way (equities). Beyond
the printing press, it sure feels like AAA corporate debt is a
safer bet than government debt given the circus in Washington.
Can the printing press operate during a government
shutdown? Probably, as much of the government seems to
run despite the current shutdown. Clearly, the market bets that the
Fed will keep buying treasuries even if treasury debt is in default
(the taper lives on), and sees the negative impact on economic
growth as a more important factor than the potential delay of a
coupon or maturity payment. In other words, beyond the
hot air in the media, investors think the Treasury will pay off its
obligations without material delay. Otherwise, why would the
treasury market find a bid and have a very low yield?
The outlook for default has risen slightly after the weekend talk
shows and the statements made by the different political figures on
the Sunday morning talk show circuit. At writing, the 10 year
treasury yield was down about 3 bps this morning at 2.63%, while
December S&P 500 futures were off about 12.00.
The Teasury will be selling 3, 10, and 30 year paper this week and
T-bills today. The auctions may provide a view on investor
interest in treasury debt and default probability. If the
markets really want to put pressure on the politicians, then poorly
bid auctions (failed auctions) would send a clear message to
Washington to get its act together. If investors don't show
up, it would be a sign that they have no confidence in the
Treasury. On the other hand, if demand is anywhere
close to average, it will allow the saga in Washington to play out
at its current speed. Nobody will seem worried.
The Treasury will sell 3 and 6 month T-bills today's. Last week's 3
month Bill auction saw a high rate of 1 bp and a median rate of 0.5
bps. There was no real sign of stress. The 3 month Bill
yield was 4 bps at writing hinting a very small default fear.
Tomorrow, the Treasury will sell 3 year paper. Over the last
year, the 3 year note auction has seen a bid to cover averaged 3.41
with a range of 2.95 to 3.96. Dealers have taken an average
of 52.5% with a max and min of 64.8% and 45.2%, while the spread
between the high and the median yield has been 1.69 bps with a
range of 1.10 bps to 2.40 bps.
: What kind of demand do you see at this week's Treasury
auctions? Will the results calm the equity market's
worry about the possible government default? Let me know your
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