"Horrendous" 5-Year Treasury Auction Raises Yet More US Deficit Concerns

I was accused of "scraping the bottom of the pork barrel" earlier for sharing this story but let no one say later on down the road that I didn't try to warn you. Some call it doom-and-glooming but I prefer to look at it as a public service for the unwashed masses. It is, as always, up to them to pay attention but even a child can understand why news like this is dangerous. Or should I explain how this works for 5 year olds? (no offense to the person who implied I was just digging for dirt in a bottomless bucket of sludge)

You see, this is how it works. The Treasury issues debt in the form of bonds, which are generally held to maturity by investors. Up until about, oh, a few weeks ago, this process worked fairly well, with only occasional bumps in the road as foreign investors faltered on concerns over the strength of the US dollar. Because you see, if the dollar tanks, investors are out. It's like this: imagine you pay $5 today for a beer you will be able to drink in 10 years. One beer costs you $5 today but because the bar needs the cash to operate, it is willing to take your $5 today and promise you two beers in 10 years for the same amount. Pretty sweet gig, right? I mean, won't you be thirsty in 10 years? But what happens if 10 years comes and goes and when you go to collect your beer they slide you two mugs full of water with just a splash of beer? You'd be pissed, right? Here you're out $5 and can't even get tipsy, let alone wasted.

Worse, what if you go to the bar 10 years down the road to collect your prize and find out they are out of business? Now imagine this happening to sovereign governments who have invested trillions in this beer scam?

Well shit! Now you see where the problem lies, surely? Hope this clears up any confusion for the uninitiated.

Ouch! Via Reuters:

The U.S. Treasury sold $39 billion in five-year debt on Wednesday in an auction that drew poor demand, raising worries over the cost of financing the government's burgeoning budget deficit.

Demand overall was below average, measured by the bid-to-cover ratio of 1.92, the weakest in almost a year.

In a further sign of weakness, yields at the auction were well above expectations, known as a "tail" by market participants.

A key proxy for foreign interest, the indirect bidder category, was slightly above the average of auctions over the past year at 36.6 percent but far below the most recent sale.

"It was just a horrendous result," William O'Donnell, head of U.S. Treasury strategy at RBS Securities in Greenwich Connecticut, said about the auction.

"It was the weakest bid-to-cover since September 2008, and by my numbers it was the biggest tail since February 1993. It was just a very, very weak result."

The tail indicates that dealers drove an unexpectedly hard bargain to raise yields, and lower prices, to buy the bonds, which spooked the bond market.

Five-year notes US5YT=RR fell further, last trading down 10/32, with the yield rising to a four week high around 2.66 percent.

Benchmark 10-year notes US10YT=RR surrendered their gains for the day and dropped into negative territory after the sale. They were last trading down 3/32, yielding 3.71 percent versus 3.69 percent at Tuesday's close.

The five-year sale is part of this week's record $115 billion in coupon securities being auctioned.

With the government set to issue $2 trillion in new bonds this year to finance economic and financial rescues, investors have been watching for any signs of waning demand for U.S. debt, particularly among foreigners.

Treasury auctions have come under particularly close scrutiny since investors began to question the longevity of the United States' prized AAA credit rating back in May.

Meanwhile, the Treasury continues to ignore these warning signs as bond auctions have gotten larger and larger despite increased feedback from the bond market that it is pretty much bloated on US debt at this point.

Who would like to place a bet as to how TPTB handle this all-too-clear sign from the market? Jr Deputy Accountant will go on record as having said they will likely ignore the market bite and push for another record-breaking auction next week. But that's just us.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.