Bad day at the bond auction drives interest rates higher; a sign of things to come?

10/08/2009 11:27 pm EST


Jim Jubak

Founder and Editor,

What if they gave a Treasury bond auction and nobody came?

"Nobody" is highly unlikely but lower demand isn't. That's what happened at Thursday's auction for $12 billion in 30-year Treasury bonds.

With demand lighter than expected yields climbed to 4.009%. Before the auction bond dealers were expecting the bonds to sell with a higher price and hence a lower yield of 3.9943%.

A few hundreds of a percentage point may not seem like much but it's a huge shift for Treasuries, one of the world's most liquid investments.

Demand, which had been 2.9 times supply in September's auction, fell to just  2.3 times supply. The biggest drop in demand came from overseas investors including foreign central banks. In September's auction overseas investors bought 46.5% of the auction compared with just 34.5% on Thursday.

Who can blame overseas investors for pulling back from the Treasury market? The U.S. dollar continues to drop. Each drop makes a U.S. Treasury worth a little bit less to investors who think and live in euros, renminbi, or won. 

The Dollar Index, which tracks the dollar against basket of currencies,  fell to the lowest level since August 2008 on Thursday.

And the U.S. economy continues to look like one of the world's weakest with the recovery here lagging all of Asia, parts of Europe, and Brazil and Chile in South America.

I'd need a higher yield too before I bought Treasury bonds against trends like those.

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