Today we had a 5 year treasury auction. It didn’t go so well. Bloomberg reports Treasuries Fall as Five-Year Note Auction Draws Yield of 1.849%:

Treasury notes fell for a fifth day after an auction of $34 billion in five-year notes drew a higher-than-forecast yield, spurring concern record sales of U.S. debt are overwhelming demand.

U.S. securities dropped even after the Federal Reserve today bought $7.5 billion of Treasury notes, its first targeted purchases of U.S. securities since the early 1960s. The five- year auction drew a yield of 1.849 percent.

“This caught a lot of people unaware,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., one of the 16 primary dealers that are required to bid at Treasury auctions. “Prior to the auction the Fed conducted its purchases of Treasuries, which may have compressed interest rates below where they would have been otherwise.”

The expected rate was 1.801%. While 4 basis points may not seem like a lot, and $34 billion is a lot for a single auction, we have a lot more to go. We have a few short duration bill auctions next week, and demand for them is still strong (if it isn’t, we’re in big trouble). However, we need to be able to push some of our debt out to longer durations. We aren’t making progress on our debt, and the bulk of it must be rolled over in a relatively short span. The principle of deficit spending, especially during an economic downturn, is that things will be better when it is time to pay back the debt. If this premise is violated, things can get very bad very quickly.

Even though I’m not a fan of deficit spending, I’ve argued against the doomsayers that feared an immediate collapse of the dollar. I’ve pointed out that right now, treasuries are still the safest investment (even if only because everything else is mierda), and fear is creating a lot of demand. I’ve made comments that treasuries are in a bubble, but the bubble will go on a lot longer than most pundits expect. Most indicators are deflationary right now. Debt, which is money, is being defaulted on faster than the government is printing money. The outstanding credit, when marked to market, is worth significantly less today than last year (this is the cause of the toxic asset problem). Unemployment is rising. Wages are being cut. Asset prices are still falling. In general, people would rather be holding cash than most alternatives. At some point, the government printing will catch up with these things, but that time is in the future. These are all things I’ve argued. These are still things I believe. Still, I am concerned.

I’m waiting on more data points. On April 8, there is a 3 year note auction. The next day there is a 10 year note auction. If those auctions don’t go well, I’ll raise the threat level. Until then, it’s important to watch the yield curve. Some steepening is acceptable (even though the Fed is actively trying to fight it right now). A broad and sustained rise of the whole curve is not. At least, not until other economic indicators start looking better.

Incidentally, we’re still doing better than the UK, who actually failed a gilt auction yesterday (it’s mentioned in the Bloomberg article).

UPDATE

Apparently there’s a seven year note auction tomorrow. That didn’t make the Bloomberg calendar. I guess I’ll get another data point soon.