As economy fears deepen, everybody wants what the Treasury sells

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Good thing Uncle Sam is floating another $102 billion of debt this week. From the looks of the Treasury market on Tuesday, there aren’t enough government securities to go around.

Investors are again rushing into Treasuries, driving yields sharply lower, as another wave of fear over the U.S. economy grips financial markets.

The bellwether 10-year T-note yield has tumbled to 2.49%, down from 2.60% on Monday and the lowest since Jan. 20, 2009 -- when yields were just starting to rebound from the depths of the financial crisis.

The lowest level the 10-year T-note reached during the crisis was 2.06% on Dec. 30, 2008. A few months ago it was inconceivable to most bond market pros that we could get there again. Now it may still be unlikely barring an economic collapse, but it’s no longer inconceivable.

In this environment, whatever debt Uncle Sam has to sell, there are plenty of buyers -- including the Federal Reserve, which committed Aug. 10 to resume buying Treasuries for its own account.

The government Tuesday sold $37 billion of new 2-year notes at a yield of 0.50%, a record auction low. The yield on previously issued 2-year notes was at 0.47%, unchanged from Monday.

The latest report on the housing market was grim, fueling more worries about a potential double-dip recession. Existing home sales fell 27% in July from June, “even weaker than our extremely pessimistic expectations,” Goldman Sachs & Co. economists said in a note.

But stocks already were selling off, and bond yields were sliding, even before the housing report. A Wall Street Journal report on the heated debate within the Fed over monetary policy -- and how much more the central bank should do for the economy -- deepened concerns that the recovery could slip away while Washington fiddles.

The Fed’s internal debate “shows that policymakers do not yet understand the severity of the situation confronting the economy,” asserts Steven Ricchiuto, economist at Mizuho Securities in New York.

Maybe the stock market doesn’t understand, either: Although share prices were broadly lower Tuesday, they bounced from their morning lows. The Dow industrials were down 116 points, or 1.1%, to 10,058 with about 15 minutes to go in the session, after trading as low as 9,993 shortly after the home-sales report was released.

Overnight, Japan’s stock market fell to a new 2010 low as the yen continued to rally against the dollar (another sign of investor fear), further threatening Japan’s export business. European stock markets also slumped, driving investors into German and British government bonds, among others.

So far, it’s all good for the U.S. Treasury, which continues to borrow heavily to fund this fiscal year’s estimated $1.3-trillion budget deficit. The government will sell $36 billion of five-year notes Wednesday and $29 billion of seven-year notes Thursday.

-- Tom Petruno