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It is always a bit of a head scratcher on why investors show interest in owning treasuries and tend to shy away from stocks when there is fear of U.S. government default on its debt. One would think the asset that might not get paid or be impaired (treasuries) would perform poorly relatively to the asset that is actually run in an investor friendly way (equities). Beyond the printing press, it sure feels like AAA corporate debt is a safer bet than government debt given the circus in Washington.
Can the printing press operate during a government shutdown? Probably, as much of the government seems to run despite the current shutdown. Clearly, the market bets that the Fed will keep buying treasuries even if treasury debt is in default (the taper lives on), and sees the negative impact on economic growth as a more important factor than the potential delay of a coupon or maturity payment. In other words, beyond the hot air in the media, investors think the Treasury will pay off its obligations without material delay. Otherwise, why would the treasury market find a bid and have a very low yield?
The outlook for default has risen slightly after the weekend talk shows and the statements made by the different political figures on the Sunday morning talk show circuit. At writing, the 10 year treasury yield was down about 3 bps this morning at 2.63%, while December S&P 500 futures were off about 12.00.
The Teasury will be selling 3, 10, and 30 year paper this week and T-bills today. The auctions may provide a view on investor interest in treasury debt and default probability. If the markets really want to put pressure on the politicians, then poorly bid auctions (failed auctions) would send a clear message to Washington to get its act together. If investors don’t show up, it would be a sign that they have no confidence in the Treasury. On the other hand, if demand is anywhere close to average, it will allow the saga in Washington to play out at its current speed. Nobody will seem worried.
The Treasury will sell 3 and 6 month T-bills today’s. Last week’s 3 month Bill auction saw a high rate of 1 bp and a median rate of 0.5 bps. There was no real sign of stress. The 3 month Bill yield was 4 bps at writing hinting a very small default fear.
Tomorrow, the Treasury will sell 3 year paper. Over the last year, the 3 year note auction has seen a bid to cover averaged 3.41 with a range of 2.95 to 3.96. Dealers have taken an average of 52.5% with a max and min of 64.8% and 45.2%, while the spread between the high and the median yield has been 1.69 bps with a range of 1.10 bps to 2.40 bps.
RTI Question: What kind of demand do you see at this week’s Treasury auctions? Will the results calm the equity market’s worry about the possible government default? Let me know your thoughts below: