The United States Federal Reserve is experiencing record demand for the short-term bonds it’s selling to focus on longer-maturity debt, a sign that the economic strength evidenced this October may well be illusory. Traders bid almost 750 billion dollars for the 54.4 billion dollars of securities due to mature from 2012 to 2014 that the central bank has put on the market since Sept. 23. This nearly 14-1 ratio far surpasses the average 3-to-1 bid that the Treasury has received for the nearly 1.8 trillion dollars of new debt it auctioned this year.
Increasing demand for short-maturity debt indicates that fixed-income investors remain concerned that the European debt crisis may not improve, slowing global growth after reports in October on the strength of the US economy suggested a resurgence. The bids suggest that government borrowing costs may stay at near record lows while the U.S. increases borrowing to finance its massive budget deficit. "The European meltdown has essentially slammed the door on what so many reserve managers thought would prove to be their most stable venue for diversifying away from the U.S. dollar," stated Charles Browning, senior investment strategist at New York based investment firm Global Partners Securities, in a memo released November 9th. "Against that backdrop, the U.S. Treasury market is looking better than ever."
Current indicators predict that unemployment will only drop to somewhere near 8 percent in 2013. That view is more pessimistic than on Aug. 9, when the Fed pledged to hold the funds rate to zero until at least the third quarter of 2013. Their forecast at that time was for the unemployment rate to dip to a range of 7 to 7.5 percent over the same period. "That’s an extremely significant move in the long-term unemployment rate and suggests it’s going to be a very long time before we see a rate bump", said Browning. "This suggests that short-term securities present real value, and we here at Global Partners Securities are looking to any increase in yield in these securities to start adding."
Increasing demand from foreign buyers seeking safety is bolstering the U.S. dollar’s status as the world’s true reserve currency, significantly raising demand for Treasuries. Net foreign purchases of Treasury notes and bonds rose to over 88 billion dollars in August from 16.5 billion in July, per Treasury Department data. "Treasuries remain the safest and most liquid instruments available and the dollar is still the world’s reserve currency. Particularly given the current situation throughout world markets, these attributes are more valuable than ever," confirmed Browning. "While it should be noted that yields will be limited by prospects for growth and inflation, we think these risks (at least with respect to 3 to 5 year instruments) are relatively minor."