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$67B Treasury Auction - Ouroboros Begins To Eat Own Tail
Following yesterday's quarterly refunding announcement by the U.S. Treasury, investment banks will be working the telephones hard to find clients to buy the record $67 billion worth of new Treasury securities scheduled to be auctioned, starting next week.Just over half the total amount ($36.3 billion) is needed to repay existing notes and bonds that are set to mature; the remainder ($30.7 billion) is new borrowing needed to cover the cost of bank rescues, fiscal stimulus and the deficit in the regular budget. The refunding portion should be relatively simple, since the money that needs to be raised is matched by the amount of funds investors will be receiving back from the government as old debts mature and are repaid. Refunding involves persuading investors to re-invest maturing funds into new securities. Only the price/yield is an issue, albeit a thorny one. New borrowing will be more challenging because it involves attracting additional funds into the Treasury market. The risk/return characteristics of Treasury debt are not particularly attractive at present. The interest rate cycle is close to the trough, yields are at multi-decade lows, and risks to investors from both the rate cycle and inflation are probably concentrated on the upside. The Fed has talked about buying longer-dated Treasury securities in an attempt to create a "buyer of last resort" to guarantee investors a floor under the market. But buying an instrument that has limited upside capital potential, and where mitigation of downside capital risk depends on the Fed's uncertain willingness and ability to buy unlimited quantities if the price falls too far, is probably not attractive for most investors. Some commentators have suggested that the normal role of benchmark U.S. Treasury bonds providing "riskless returns" has been inverted and they now provide returnless risks. So the investment banks may find it hard to find customers for the new issues. Posted by: Anonymoose 2009-02-07 |
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