Healthcare overhaul’s quiet ally: The bond market

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

The stock market on Monday failed to express alarm over the Obama administration’s $1-trillion healthcare overhaul: The Dow Jones industrials edged up to a new 17-month high.

Now bond investors, who are providing the actual financing of the government’s massive budget deficits, will get a chance to register their approval or disapproval of the healthcare tab: The Treasury on Tuesday will sell $44 billion in new two-year notes, the first of three debt sales expected to raise a total of $118 billion this week.

Almost certainly, the Treasury’s auctions will go smoothly -- because investors’ appetite for U.S. bonds remains unsated even after the record dollar volume of debt offerings over the last year.

Wall Street may expect that Uncle Sam one day will be forced to pay far higher interest rates to borrow, but for the moment investors remain happy to accept an annualized yield of just 1% or so on a two-year T-note. The yield on existing T-notes was 0.97% on Monday, heading into Tuesday’s auction.

The Treasury also will sell $42 billion in five-year notes on Wednesday and $32 billion in seven-year notes on Thursday, probably at yields close to current market levels of 2.4% and 3.1%, respectively.

In theory, a fast way to bring political pressure for deficit reduction would be for investors to balk at buying Treasury debt, driving yields up sharply.

Instead, buyers keep swarming at every Treasury auction. When the government offered $44 billion of two-year T-notes for sale last month, it got $146 billion in bids. . . .

“The demand part of the equation has been more than offsetting” worries about too much supply, said George Goncalves, head of U.S. interest rates strategy at Nomura Securities International.
Why are investors still such eager Treasury buyers? For one thing, the Federal Reserve continues to provide an anchor for interest rates by holding its key short-term rate near zero.

Continuing fear of a European government debt crisis stemming from Greece’s woes also has enhanced the haven status of Treasuries this year for investors worldwide, including foreign central banks.

And for many individuals, a guaranteed rate of return even in low- to mid-single-digits sounds better than gambling in the stock market after the crash of 2008.

Some day, investors may well look back at these mammoth Treasury auctions and wonder, “What were we thinking?”

But for now, the bond market’s only question to Uncle Sam is: How much more would you like?

-- Tom Petruno