The Potential For Negative Feedback

Treasury Notes Decline as Record Debt Auctions Weigh on Demand
By Susanne Walker and Daniel Kruger

July 29 (Bloomberg) -- Treasury notes fell after a government auction of a record amount of notes drew higher-than- forecast yields for a second consecutive day, renewing concern a deluge of U.S. debt will overwhelm investor demand.
The $39 billion in five-year notes yielded 2.689 percent, more than 2.635 percent median forecast of eight primary dealers surveyed by Bloomberg News. Investors also demanded higher yields on yesterday’s $42 billion of two-year notes. Demand from an investor class that includes foreign central banks declined at each of the auctions from last month, when those sales attracted the most interest in at least six years.
You’re starting to see customers pull back from the market,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “It’s been a fundamental shift in central bank buying.”

The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 1.92. At the June 24 auction, the notes drew a yield of 2.7 percent, the highest since October.
The total bids are not extraordinary -- what’s extraordinary is the size of the issue,” said William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 18 primary dealers required to bid at Treasury auctions. “We’ve just reached the point of saturation in the marketplace, clearly, and it’s just made it very difficult to get these things done.”

Commentary: The danger with large issuance of debt is that the savings oriented nations slow or stop buying. At what point with China & Japan demand much higher returns for bonds? Will the US pay the higher rates or will they monetize instead?

The slope we are going down seems to be getting steeper and slippery.