FRIDAY AUGUST 14, 2009

Interpreting Bond Auction Results

The normally boring, often ignored Treasury bond auctions are beginning to receive attention from the equity markets. Yesterday’s 30 year Treasury bond auction results created a nice pop in equity prices. The U.S. Treasury announced that the auction of a record size $15 billion of 30 year bonds went well. The coverage ratio, the amount of bids relative to the available amount, was strong. And the equity markets seemed to breathed a sigh of relief! Why? 


The ultimate fear in the markets, both stock and bond, is the massive foreign and domestic government spending occurring and the potential for ugly consequences. This fear is particularly salient in the U.S., home of the world’s reserve currency. If the massive government spending continues unabated, the markets are afraid that it will lead to a weakened dollar, rising inflation, and higher interest rates. The weak dollar will erode the returns of foreign buyers, mainly China, forcing them to abandon the Treasury bond market. After all, with a 4.5% coupon, it doesn’t take much dollar weakness to eliminate the interest return. If they do abandon the market, domestic interest rates would likely rise significantly, slowing or eliminating the fragile economic recovery.

 

This week’s auction results allowed the markets to relax…for the moment. The markets have concluded that interest rates will remain steady. However, another interpretation of the strong auction results may be less bullish. Could it be that investors are still willing to pay a premium for the safety and security of Treasury bonds? If so, what does that say about economic recovery?   

POSTED AT 1899-12-30 09:12:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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The opinions expressed here do not represent the views of Alliance Financial Corporation and Alliance Bank, N.A. This communication is not an offer or solicitation for the purchase or sale of any security, is for general informational purposes only and does not provide personalized investment advice. When making personal investment decisions you should consult your investment adviser or rely on your own research. Copyright 2008.