US Treasuries Fall as Foreign Demand Wanes

Yield on US Treasuries advanced this week as demand for the $118B  of 2, 5 and 7 year notes was weak.  Demand from indirect bidders, the group that contains foreign central banks, and direct bidders, which includes domestic money managers both slipped.  The yield on the bench mark 10 year bond increased to 3.90% before retreating to 3.86%.  This yield is far less than the 6.3% the Greek's had to pay for their 10 year notes, but a continuation of this trend in the US may hinder recovery in the US housing market.  Many home loans are priced in relation to the 10 year paper and the recovery  is endangered by the biggest rate jump since December.

Some attribute the Greek sovereign debt crises as a catalyst for the higher rates.  In a Market Watch bond review this morning they said:


"What's changed is that investor outlooks on the fiscal side have turned decidedly more downbeat since Greece's debt woes were first splashed onto the front pages of the main papers," RBS Securities' Bill O'Donnell and Aaron Kohli said.

"The spotlight on Greece only helped to reveal that that the U.S.'s kitchen (federal and state budget balances) was itself full of cockroaches," the bond strategists wrote in a note."


Fed Chairman Bernanke, during the past year, expanded the balance sheet of the Central Bank by the purchase of agency paper from Fannie and Freddie.  If these lns were priced, mark to market, as the IRS demands, what would the new Fed balance sheet look like?

With current massive US budget deficit heading for a record of $1.6T, big bi weekly Treasury auctions will be the norm.  We wonder if the current auction is a fluke or the beginning an upward spiral in rates, as global governments compete for money to fund their deficits.  Bill Gross, the world's largest bond fund manager has expressed his views, when he told CNBC he prefers stocks over bonds.  According to
MONEYNEWS.COM he said:

"Let's suggest the economy looks good, that risk assets — whether it's high-yield bonds or whether it's stocks — have a decent return relative to the potential of declining bond prices," he said. "I'll go with the stock market."

Gross also cited "the healthcare situation and the $40 trillion worth of present value in terms of entitlements we have in the United States," he said.

"We just added in my opinion another $500 billion in terms of healthcare and the markets are beginning to look at that suspiciously."
The dollar got a boost this past week, benefiting from the chaos caused by the Euro bankers response to the Greek crises.  If the current agreement, which assigns two thirds of the bail out to the Europeans, and one third to the Washington based IMF holds, what will be the next problem that concerns currency traders.  Higher yields in the US may attract some investor interest from yield seekers, but we all know which direction bonds go if the rates work higher.  We are very cautious about the short side of the euro versus the dollar.  Not all of the debt problems are in Greece.