Today’s 20-year Treasury auction will be the first since 1986

Interesting day in the bond market

The Treasury will jump into 20-year sales today for the first time in 34 years.
The initial auction of $20 billion is a relatively large one and is a reminder of how much debt the US is piling on. The notes are trading at 1.230%-1.220% on the bid/ask in the when-issued market. That puts them much closer to 30-year bonds (1.44%) than 10-years (0.71%).
“An auction concession of some sort is warranted; although we anticipate the new issue will be well absorbed even if it comes at a modest discount,” writes Ian Lyngen, head of US rates strategy at BMO.
The broader bond market is reluctant to send and clear signals at the moment. 10s have been in a tight range for six weeks now and it’s tough to envision a clear break on either side because you have inflation keeping yields up and the Fed keeping them down.
Interesting day in the bond market

Spain Sells 3 Year Bonds At 3.717%, 119 bps Higher Than Prior Auction

For a demonstration of the unsustainable course that European sovereign funding is on, look no further than Spain, where earlier the government auctioned off €2.468 billion in three year notes for a whopping 3.717%. The bid to cover was 2.27 compared to 2.16 in October, and it was reported that foreign buyers bid above 60% of the auction (which means the ECB funded domestic banks bought about 40%). However, the same issued priced at 2.527% at the last sale on Oct. 7, a 119 bps difference. Still it wasn’t all bad, considering the bond had traded at almost 4% in recent days. As Reuters reports: “Analysts and bond market players had predicted a leap of as much as 2 percentage points in yields, but Madrid’s situation has been helped by mounting expectations the European Central Bank will step up extraordinary measures to contain the crisis.” The problem for Spain is that it has minimized the amount of debt it is issuing during turbulent times: “The Treasury had cut the amount of bonds on offer in order to trim financing costs as it faces down market doubts on whether it can bring down its deficit due to sluggish economic growth and persistent concerns it might need to bailout its debt-laden banks.” And the problem for the ECB is that it most likely, as many analysts are predicting, will not announce anything of substance, as otherwise the ECB will have to monetize up to €1.5 trillion in total debt and interest through the end of 2011. The result for the EUR will inevitably be disastrous in either case, and if in 25 minutes JCT indeed announces nothing, look for all those who bid up the bond auction earlier to be tearing out their hair as the 3 Year promptly passes 4%.

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