Supply may be an issue, but economics always dominate the market. This is one of the reasons why it has always been hard to model supply with interest rate changes. With the stock market declining for four weeks and economic data showing a weak recovery, Treasury debt will be the place to put cash. The Treasury was more than happy to provide the supply, a total of over $160 billion in one week.
4-week bills $34 billion
13-week bills $32 billion
26-week bills $31 billion
3-year notes $35 billion
10-year bonds $19 billion
30-year bonds $11 billion
The bill auctions are for the most part rolling over existing debt and is demanded by many who still are holding large cash balances since the credit crisis accelerated last Fall. The longer-end raised new money.
The auctions went well but the process still depends on dealers taking down debt and distributing it. What happens when the economics are not favorable for the next set of auction. The dealers get hit by a freight train and there is a deep sell-off. The Fed has added two new primary dealers but the amount of capital that is used to distribute Treasury debt is limited. Models may be of limited help given the size of the auctions that the market will face. This will be an ongoing problem.
The auctions went well but the process still depends on dealers taking down debt and distributing it. What happens when the economics are not favorable for the next set of auction. The dealers get hit by a freight train and there is a deep sell-off. The Fed has added two new primary dealers but the amount of capital that is used to distribute Treasury debt is limited. Models may be of limited help given the size of the auctions that the market will face. This will be an ongoing problem.
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