30YR Bond Auction Goes Badly

A: As I said many times here, the fed can NOT control the long end of the curve! We have massive treasury issuance upcoming to fund our debt interest obligations, government functions, and rescue plans! Today's auction of $10Bln in 30-YR Treasury bonds did not go well as investors demanded a higher yield for the longer term product; perhaps something we should get used to!

I discussed my thoughts on how this New Age Slowdown Could Pop Treasury Bubble, and the problems I see at the long end of the curve:

"But the hidden danger lies in the after-effects of funding these rescue/bailout packages ---> with massive treasury issuance may come the inevitable popping of the treasury bubble, emphasis on the long end of the curve. If the long end of the curve does pop, and treasury yields spike down the road, think about how that will affect borrowing costs for businesses and lending rates for homebuyers/consumers. This may be a side effect of the massive medicine we took to combat this new age slowdown, is a multi-year train of thought and yes, it is worth discussing on a real estate blog."

Bloomberg reports, "U.S. Treasuries Fall After Investors Shun 30-Year Bond Auction":

The bonds drew a yield about 9 basis points above the level in pre-auction trading. At 4.31 percent, it was still the lowest since regular sales of the security began in 1977. Investors have been favoring shorter-term debt, which serves as a haven in times of turmoil and a bet the Federal Reserve will lower interest rates. "The 30-year is not a central bank product, and there's no real interest from pension funds" at a yield below 4.5 percent, said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. "There's just no interest in it."

No interest is right, not at these current yields at least! John Jansen over at Across The Curve delves in on how this auction cost the taxpayers an additional $175,000,000:

The Treasury auctioned $10 billion Long Bonds and the result was a genuine debacle for the taxpayers. A tail is the number of basis points from where the issue was trading in the market moments prior to the auction to the level at which it actually cleared. The auction average was about 10 basis points cheaper than market levels.That is mucho dinero. One basis point on a Long Bond equals 5 ½ /32s. The nuns taught me quite well in grammar school and that means that 10 basis points equal 55/32s. Because I do not wish to work to hard I am going to proclaim the result 56/32s which is 1 ¾ points and an easier number to work with it. That means that for every million bonds auctioned the Treasury paid an extra $17,500.

Ten billion bonds is ten thousand million which when multiplied by $17,500 means the result cost the taxpayers $175,000,000.

Now I am no bond expert, but then again I don't have to be. There are fundamental reasons why the long end may experience rising yields in the years to come and they include:

a) a 27 year secular bull market
b) massive upcoming issuance (supply) to fund the rescue of our financial system
c) markets questioning credit worthiness of US resulting from this crisis and actions taken; rising CDS premium on 10YR treasuries as an example
d) effect of US slowdown on China and other exporting countries that hold massive amounts of our treasuries and have been funding our debts
e) flood of interest into treasuries over the past year as a safe haven driving yields to ultra low levels; when market turns, reversal could be dramatic
f) introduction of Ultra-Short Treasury ETFs; hmmmmmm....

Add to the list a lack of interest at the long end at current yields! Most of the issuance upcoming is likely going to be in the short end, and probably the 2-YR. But this auction today really gives us a clue of what some of us have been discussing for months now.

Related:

SEPT 25th - Recapitalize & Steepen; Markets Paralyzed

AUG 4th - Peak Credit & What That May Mean