If it seems like the fate of the world hangs in the balance every time the U.S. Treasury auctions off another batch of bonds, that's because it kind of does. This week, the Treasury is scheduled to offer up for sale $104 billion dollars worth of two-year, five-year, and seven-year notes. That's the most ever in a single week, and since this is how the mightiest economy in the world manages to spend more than it earns (in taxes), there's a lot riding on how much demand surfaces from buyers. If there's too little, the cost of U.S. borrowing rises, imperiling the Obama agenda.
Tuesday was a good day for the Obama administration, insofar as the cost of funding future deficit spending is considered. Appetite for $40 billion worth of two-year notes was brisk, and yields fell. And so, as is the practice on Wall Street, the conventional wisdom on what it all means flipped on its head, once again. A few weeks ago, the lack of demand for Treasuries and consequent spiking of yields was seized upon as evidence that either bond investors were terrified of the inflation certain to be generated by all that deficit spending, or that the economy was beginning to improve enough so that investors were moving their money into higher risk investments. Uh, not so fast!
The latter explanation is looking a little more likely, this Tuesday afternoon, because it's pretty obvious that nothing at all has changed on the deficit spending front. If bond investors were freaking out about the long-range fiscal and monetary implications of the Obama agenda three weeks, surely they would still be doing so today. What really seems to be affecting investment decisions are the daily-changing attitudes and expectations about a possible economic recovery. In recent weeks the evidence supporting the "green shoots" theory has become mighty thin. So the money floods back in to the safest place to park your money on the globe: U.S. Treasuries.
"People are coming to the realization that the Treasury market offers very good value in light of current economic conditions," said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets....
"Bonds are a good risk-free value if you think the economy will double dip," said Michael Franzese, head of government bond trading for Standard Chartered in New York. "At these yield levels, there's a lot of bang for your buck there."
It's fun to compare these quotes to those I extracted from a Bloomberg article a couple of weeks ago declaring that rising bond yields signaled a rejection of big Obama budgets. World views on Wall Street are flipping with manic kaleidoscopic speed with every new data point that emerges, but presumably, the real universe of possible futures isn't shifting from scenario to scenario quite as quickly. To actually make a difference in what will happen -- to lower the unemployment rate -- for example, will take sustained effort over time. Democrats are supposedly freaking out that the rate at which unemployment is rising isn't slowing as quickly as one would hope after the passage of an $800 billion stimulus bill. But as our President never tires of reminding us, it took a long time to get in the mess we are in today, and it will take a long time to get out.
Who knows, tomorrow's Treasury auction of five-year notes may bomb, and the conventional wisdom will shift again, and people will be coming to yet another "realization." It's a little crazy-making and I'm as guilty as anyone of playing along, of attempting to discern the future in the latest housing market economic indicator or oil price spike or widening credit swap spread, even as I know that most of it is just noise that will be contradicted by some other data point in the next minute or hour or day. My hope is that some overall pattern begins to emerge that makes sense, and a trustworthy narrative emerges. But these are highly confused times. A couple of years ago, it seemed pretty clear that we were headed for a significant downturn, though there were plenty of contradictory blips along the way. Perhaps the most notable aspect of our current circumstances, helping to explain why every day we embrace a different weltanshauung, is that we just don't know what's going to happen, whether we are bloggers or Nobel Prize winners. This is always true, to some extent, for each and every one of us, but now it seems more true than ever.