Treasurys fall as investors brace for supply glut
NEW YORK -- Longer-term Treasury bond yields extended their advance Monday as investors braced for the possibility that the government will have to issue even more debt than the market has anticipated.
If President-elect Barack Obama's planned tax cut of up to $300 billion is approved, the government will need to sell Treasurys to make up for the shortfall. An increase in Treasury supply usually translates to a drop in prices and rebound in yields -- even if the economy remains weak.
"Unfortunately, macroeconomics has little to do with the interest rate call," said T.J. Marta, fixed-income analyst at RBC Capital Markets. "You have to figure out what the government program is going to be."
The Treasury Department has already been selling record amounts of debt in recent weeks. It said Monday it will auction $30 billion in three-year notes this week, and re-auction $16 billion in previously issued 10-year notes.
As more debt comes into the market, Treasury prices have fallen and yields have been rising from the record lows reached in December. The 30-year bond yield was at 3.03 percent late Monday -- up from 2.81 percent on Friday and up from its December low of 2.51 percent. That was the bond's lowest yield since the government started issuing it regularly.
"Treasurys may well have gotten ahead of themselves," said Mike Englund, chief economist at Action Economics.
The government is issuing debt to finance its various financial rescue efforts, because at the moment, taxes aren't enough to pay for it.
The government is already collecting fewer taxes from individuals and corporations than in previous years simply because they are making less money, and in some cases posting losses. U.S. daily Treasury tax receipts tumbled 13 percent year-over-year in December, noted Englund -- even worse than November's 4.2 percent decline and October's 7.5 percent drop.
There are two major ways that a recovery in Treasury yields could be limited: if the recession is much worse than expected, and if the Federal Reserve starts buying a significant amount of Treasurys.
The Fed announced in November that it would buy mortgage-backed securities, and started doing so on Monday, stoking a rally. Rates on those securities have been falling as investors pour money back into that market, and in turn, the actual mortgage rates that homeowners pay have also dropped.
The central bank said last month that it might decide to buy Treasurys, too. This could happen, Marta said, if Treasury yields get too high compared to yields on other debt. The Fed wants banks to boost lending, and banks will only have incentive to do so if there is a wide spread between yields on safe assets, like Treasurys, and yields on riskier assets.
Late Monday, the two-year Treasury note rose 3/32 to 100 5/32, and its yield fell to 0.78 percent from 0.86 percent late Friday. But long-term Treasurys declined. The 10-year note fell 1 8/32 to 111 1/32, and its yield rose to 2.48 percent from 2.39 percent. The 30-year Treasury bond sank 5 10/32 to 128 12/32, and its yield rose to 3.03 percent from 2.81 percent, according to BGCantor Market Data.
The yield on the three-month T-bill, considered one of the safest investments, rose to 0.09 percent from 0.07 percent. Its discount rate was 0.03.
In addition to the anticipation of more record auctions of Treasurys, investors found reason to sell off after the Commerce Department said construction spending fell by 0.6 percent, less than expected, in November. Record activity on nonresidential construction helped offset another steep decline in housing activity.
Bank-to-bank lending rates have fallen since spiking last year, a good sign that financial institutions are more willing to lend to one another. The cost of three-month dollar loans between banks rose modestly Monday by 0.01 percentage point to 1.42 percent, as measured by the British Bankers' Association's London Interbank Offered Rate, or Libor.