The first auction this week was of two-year notes. It was again a record size, $69 billion, we will see that all year as the incredible mountain of new debt and rolled-over debt comes to market. Demand was good, but here’s why, the government had to pay 4.9% interest to sell the notes, up from 4.59% just last month. Demand is good because it is kind of a no-brainer to get a pretty risk-free almost 5% for two-years, especially if you believe, as I do, that rates aren’t going to be any lower in two years, so you can just re-up for your 5%.
And here is how bad our interest rate and interest paid problem is. One year ago, two-year notes were sold at a 4% interest rate. Two years ago, the rate 2.6%, so if those notes were part of the roll-over, more than two percentage points more of interest is being paid. Three years ago the rate was a mere .16%, basically nothing. The rates that have to be paid to get two-year notes sold now is the highest it has been in decades. I don’t think there is anyway it is going down, and the Treasury can fool itself all it wants that it should keep selling high rate short-term debt in the belief that sooner or later rates will come down. All they are doing is making the total interest bill higher for longer. And I am sure that the next longer term auction, particularly 30 year bonds, will face reticent demand and have to offer higher rates to be sold. (ZH Post)
