Sunday, July 3, 2011

Yields on a one way journey

I have noted in previous posts that with the end of QE, the only way to go in terms of yields is up. The Fed was by far and away the dominant buyer of Tresuries, and in the absence of a different buyer to step up and take their place, price would undlubtedly fall (and yields rise).
Thats taking a look on the demand side. What about on the supply side? Since 16th May, total US debt has been flat at $14.345 billion, due to the restriction of the debt ceiling. Presumably, after much political fighting, the debt ceiling will be raised once more. At which time, the Treasury will not only issue as much debt as before, but massively more in the short term to catchup with the ongoing run rate. Ie it will need to plug a gap of over 2 months of accrued Tresaury issuance, and also to refund the retirement accounts it has been borrowing from to buy some more time.
SO we are looking at rising yields due to a decrease in demand, and a pretty hefty increase in supply.
We started seeing that last week, with the move in the 5 year the largest move in percentage points ...... EVER!!!
Perhaps the (temporary) rescue of Greece should convert the PIGS into PISA? I wonder who the A stands for ...... answers on a postcard!!!

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