Big Ben moves the market
Today's Financial News - Posted August 12, 2009
There is plenty of action for investors to contemplate today. The Treasury is unloading record levels of debt. The Fed is wrapping up its buying spree. And the equities market is loving the action.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Blame it on the recent surge in the equities market. Blame it on an increasing appetite for risk. Or blame it on global warming. It doesn’t matter what the cause. All that’s important is it cost Uncle Sam a bit more to fund his spending binge today than it did last week.
The folks over at the Treasury Department just wrapped up their latest debt auction. This time they were unloading 10-year notes in an effort to find an extra $23 billion to keep the government doing whatever it does these days.
The notion that the world’s demand for American debt is slowing is becoming increasingly clear as the Treasury continues flooding the market.
In today’s market, the bid-to-cover ratio was 2.49, with $2.49 offered for every $1 the Treasury was willing to sell. The large figure proves demand is still there, but compared to the 3.28 figure we saw just last month, it shows equilibrium is getting closer.
Before the auction, the Street gave the notes an interest rate of 3.688%. But after the market’s forces took control, the debt was issued with a rate of 3.734%.
Even more important than today’s auction is the official word Bernanke and his friends at the Federal Reserve are ready to back out of the markets.
Thinning the balance sheet
Earlier this year, the Fed announced it was going to purchase $300 billion worth of the Treasury’s debt in an effort to increase demand and keep interest rates low. Now that Big Ben spent all but $50 billion or so of his allocation, the Fed tells us this afternoon that it is going to slow its purchases with the goal of depletion by the end of October.
This move will certainly create a tendency for interest rates to rise over the next several weeks.
What does it mean for investors?
Since “zero-risk” interest rates are a variable in just about every efficient-market valuation equation, an increase in rates spells an increase in the equities market. The trick for investors, of course, is to figure out if today’s news has already been priced into the markets.
You can bet currency traders are hard at work calculating the global effect of rising interest rates. With the Bank of England unexpectedly adding more money to its own bond purchase program, today’s action should work to strengthen the dollar, at least until European markets catch up. Then all bets are off.
Finally, it is important, vital actually, to remember that today’s action will continue. If we look at the news as merely as single snapshot, or a frame of a movie, it looks fairly bullish. If, however, we hit play and watch the auctions repeat week after week after week through the indefinite future, we quickly realize the action is not sustainable.
Eventually, those critical bid-to-cover ratios will dip significantly and the Treasury will have a tougher time funding Washington’s hideous spending.
When that happens, the bulls will be tough to find.
Next Article: Record deficits spell new incentive for Commodities Carry Trade
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