Pyongyang’s missiles might help U.S. sell some bonds

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North Korea could turn out to be Uncle Sam’s unwitting promotional agent this week.

The U.S. Treasury will auction a massive $101 billion in bonds over the next three days into a market that has already been choking on supply this spring.

North Korea’s missile tests, however, could inject just enough fear into global markets to help firm up demand for Treasury securities, if just temporarily.

Overseas Monday and today, a modest rebound in the dollar -- which has been dumped along with Treasuries in recent weeks -- was a hopeful sign for the government bond market.

As noted in this post last week, global investors have had every good reason to sell the dollar and Treasuries lately, and no reason to buy. The U.S. must continue to borrow at an unprecedented rate to fund the Obama administration’s economic and financial-system bailouts, even as investors have been finding much more interesting places to put their money -- emerging markets and commodities, for example.

But there are signs of fatigue this week in some emerging stock markets, including China and Russia, and in the oil market.

Yields on Treasuries have surged this year as investors have demanded higher returns, but the 3.44% annualized yield on a 10-year T-note still is well below the 4%-plus that prevailed before the financial meltdown began last fall.

The Treasury’s auctions begin today with the sale of $40 billion in two-year notes. The government will sell $35 billion in five-year notes on Wednesday and $26 billion in seven-year notes on Thursday.

Two-year notes in the marketplace currently yield about 0.9%, five-year notes pay 2.2% and seven-year notes pay 2.9%.

UPDATE at 11 a.m. PDT Tuesday: Demand was very strong at the two-year T-note auction today. The notes sold at a yield of 0.94%, slightly below expectations. But shorter-term securities always are the easiest for the Treasury to sell. The bigger test will be the five- and seven-year notes.

-- Tom Petruno

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