This Week’s Treasury Auctions

The auctions this week were on the long end–20 year and 30 year.  They were also far smaller than the short-end auctions are, about 1/5th to 1/4th the size.  They are small in part because I don’t think the Treasury can sell more without paying much higher interest rates.  The 20 year auction on Wednesday was $16 billion worth and priced at about the expected interest rate, not overwhelmingly high at 4.16%, but demand characteristics were not strong.  And I think the buyers are delusional if they think that interest rate is going to compensate them for either inflation or default risk over the next 20 years.  (ZH Post)

Today was a 30 year bond auction, but it was of “TIPS” bonds, which offer an inflation-adjusted yield.  The yield at which they sell reflects how much above the measured inflation rate the investor wants to be paid to buy the bond.  That spread has risen substantially in recent months, probably because investors perceive greater risk in all US debt and because of concerns that inflation may persist and not be fully reflected in the “official” numbers.  That after inflation yield in this auction was around 2.06%.  If you are very risk averse and believe that in some universe the US will get its deficit and debt problem under control, these are probably good investments.