Another Quick Note on the Week’s Treasury Auctions

The US Treasury has a terrible job right now, juggling the huge pile of US debt.  Unprecendented amounts of debt have to be issued and rolled-over.  This week, we had a two-year note auction, $69 billion worth, that sold at a 3.87% interest rate, down from the spring, but high for that maturity.  The auction went off fairly well, although the demand characteristics were not great.  Then we had $70 billion in five year notes sold Wednesday, at a higher than expected rate of 3.64%, although also down from the spring.  Demand characteristics were okay.  Today, $44 billion in 7 year notes were sold.  As I keep saying, the longer the debt term, the worse the auction and this one was not as good as the earlier ones.  A slightly higher than desired interest rate had to be paid and the demand characteristics were mediocre. (ZH Post)

Also of note, however, is that Treasury sold $165 billion in four and eight week bills–very short term debt that carries a very high interest rate, well over 5%.  It is fascinating that the government is willing to pay such a high rate just to avoid trying to sell greater amounts of even two or five year paper at substantially lower rates.  Unless of course, Treasury knows that if it tried to sell that much of two or five year debt, it would have to pay significantly higher rates.  If you roll over four week paper 12 times a year, or eight week paper 6 times a year, you are paying a lot more total interest, adding to the deficit.  It is a big price to pay just to hide the market’s lack of affection for massive amounts of longer-term debt.

Here is the Hail Mary scenario the Treasury is hoping for.  By some miracle long term rates go way down, I mean to like 3% or less, and it can start converting a lot of short term debt for longer term, lowering the total interest bill.  I don’t believe there is any way that happens.