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Friday, June 26, 2009

Big Week For Treasuries

Last week, I pointed out that this would be a very important week for U.S. Treasury bonds. That's because there was going to be a record amount auctioned off this week, $104 billion. Treasury rates have been rising steadily since the end of April and their continued rise threatens the real estate market and the economy in general.

Treasury bonds have had a remarkable week. The ten year bond has actually lost about three tenth of a percent this week with about an hour left of trading. A little bit of this gain was due to a weak stock market. The bulk, however, was due to excellent bond auctions. Yesterday, the ten year lost fourteen basis points (fourteen hundredth of a percent) after a $40 billion 7 year bond auction did fabulously well.

The ten year hasn't merely done well, but its remarkable week has been totally inexplicable. Up until this week, there was absolutely no appetite for treasury bonds. Then, the U.S. Treasury decides to auction off a record in a week. This appeared to be a recipe for disaster. Instead, it lead to one of the biggest rallies in U.S. Treasuries in months.

The only explanation I can think of is quantitative easing. It appears to me that the Federal Reserve bought a lot of these and other investors followed when they saw how well they were doing. There's more auctions next week though nothing near the scale of this week's auctions.

It will be of very great interest to see if this trend continues or if bonds pull back next week.

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