As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Thursday, February 23, 2006

Oh Crap

This is really ominous news. From Reuters:

U.S. Treasury debt prices extended losses on Thursday after an auction of five-year notes garnered surprisingly weak demand, including from indirect bidders.

That category includes customers of primary dealers but also foreign central banks, and it is therefore used as a proxy for offshore interest in U.S. government debt.

Already unnerved by a drop in jobless claims that reinforced the likelihood of further interest rate hikes from the Federal Reserve, traders kept bond prices well into negative territory.

"It was a terrible auction," summed up one trader at a U.S. primary dealer. "The bid-to-cover stank, the indirect bid was bad -- I would be surprised if the market manages to rally from here."

We all know how this works. We put billions and billions on our national credit card and auction off the debt to the highest bidder. In the past, Asian nations (led by China and Japan) were happy to snap those dollars up. After all, it gave us the capital we needed to continue purchasing their goods. They were basically giving us money so we could give it back to them. It was a faith-based economy; as long as the other countries believed in the myth that we actually might pay them back, and as long as we believed in the myth that no nation would ever so no to us, everybody could rest easy.

Well, today was a very, very bad sign. Only 21% of the 14 billion dollars we offered was snapped up. The long-term yield on these notes remains lower than the short-term yield on 5-year notes, known as the inverted yield curve:

Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in 2000 just before the U.S. equity markets collapsed. An inverse yield curve predicts lower interest rates in the future as longer-term bonds are being demanded, sending the yields down.

Now, I'm no bonddad, but as an armchair economist who balances his own budget, thank you very much, this looks extremely bad. Add in to this the fact that the Iranian bourse (as discussed in Sherlock Google's diary) will soon trade in petro-Euros instead of petro-dollars, and this could be the moment when everything simply falls to pieces. Somebody has stopped believing in this faith-based economy.