The Market
| 25 March 2010
As reported by Cordell Eddings at Bloomberg.com the US Treasury auctions this week showed there first signs of fatigue. Call it the Healthcare Bill morning after affect, too much US government bond supply catching up to the market, or it’s simply just time for higher rates. As reported in Eddings article:
Auction Demand:
Demand waned at this week’s auctions of two-, five- and seven-year notes as signs of improvement in the economy boosted appetite for higher-yielding assets.
At the $32 billion seven-year note sale on March 25, investors bid for 2.61 times the amount of debt on offer, the least in 10 months.
The $42 billion auction of five-year debt a day earlier drew a yield of 2.605 percent, compared with the average forecast of 2.556 percent in a survey of eight of the Fed’s 18 primary dealers. The difference of 4.9 basis points was the largest since July, based on Bloomberg surveys.
Investors bid for 3 times the $44 billion of two-year notes sold on March 23, the lowest since December’s sale.
Gross on Borrowing
Excess borrowing in nations including the U.S., U.K. and Japan will eventually lead to inflation as governments sell record amounts of debt to finance surging deficits, Gross said in an interview this week with Tom Keene on Bloomberg Radio from the headquarters of Pacific Investment Management Co. in Newport Beach, California.
As Macro events going forward that result in increasing interest rates should be more of the norm instead of the exception given the business cycle research we use from Pring Turner. That research has called for the start of phase 4 in the Biz cycle and has as one of its qualities the quickening of interest rate increases.
Don’t expect interest rates to run to far since deflationary forces still have the upper hand. In years to come though, we could very well look back at these government bond auctions as when government interest rates finally started showing the strain of all the supply.
How this affects our clients: As we move further into stage 4 clients will see their investment mix become less exposed to interest rate sensitive investments as well as become focused in later stage investments such as materials, energy and consumer nondiscretionary as these groups benefit relatively more from stages 4 & 5.
