US Treasury Debt Demand Weakens

This week saw several auctions of public debt issuance. The results are a possible signal that there is less demand for US debt than in the past. Here are results for the 2 year note, 5 year note and 7 year note. Highlights are written by Econoday.
On the 2 Year Note auction:
Highlights
This week's run of coupon auctions is getting off to a slow start. Coverage of 3.08 for today's $35 billion 2-year auction is on the low side of trend and is well below May's 3.46. The stop-out rate of 0.395 percent is one basis point higher than the one o'clock bid. In another sign of weakness, dealers were awarded 65 percent of the auction which is the most in more than two years. Demand for Treasuries is easing following the results. Tomorrow the Treasury auctions $35 billion of 5-year notes.
On the 5 Year Note auction:
Highlights
Buyer resistance may be appearing for Treasuries, judging by yesterday's soft 2-year note auction and today's even softer 5-year auction. Coverage is 2.59, the lowest of the last ten auctions, all $35 billion in size. In another sign of weakness, the high yield of 1.615 percent is more than two basis points above the one o'clock bid. Dealers ended up taking down 52 percent of the offering for the highest rate of the last four auctions in yet another sign that demand is soft. Demand for Treasuries is falling in reaction to the results which point to trouble for tomorrow's $29 billion 7-year auction.
On the 7 Year Note auction:
Highlights
Treasury supply may finally be getting ahead of demand. That's a conclusion that can reasonably be drawn from this week's poorly received string of coupon auctions including today's $29 billion offering of 7-year notes. Coverage of 2.62 is light for this issue while the high yield of 2.43 percent is three basis points over expectations. In a sign of weak retail demand, dealers ended up taking down an outsized 56 percent share of the offering. Demand for Treasuries is sinking following today's results.

Here is a look at the IEI daily graph (iShares Barclays 3-7 Yr Treasury Bond index):

Market Data: Week Ending June 24, 2011

Market Index	12/31  Close	6/24    Close	Week Change	Simple YTD %
Dow Industrials Avg	11,577.50	11,934.60	-0.58%	3.08%
S&P 500	1,257.64	1,268.45	-0.24%	0.86%
Fed Funds Rate	0.10%	0.10%	-0.01%	0.00%
10 yr T-note Yld	3.29%	2.86%	-0.08%	-13.07%
5 yr T-note Yld	2.01%	1.37%	-0.16%	-31.84%
5 yr TIPS - 'Real' Yld	-0.06%	-0.48%	-0.02%	-700.00%
Implied 5 yr Inflation %	2.07%	1.85%	-0.14%	-10.63%
2 yr T-note Yld	0.59%	0.33%	-0.04%	-44.07%
2-10 Yr Slope	2.70%	2.53%	-0.04%	-6.30%
90 day T-bill Yld	0.12%	0.01%	-0.02%	-91.67%
Gold ($/oz)	$1,421.40	$1,500.90	-$38.20	5.59%
WTI Oil ($/brl)	$91.38	$91.16	-$1.85	-0.24%
VIX "Worry Index"	17.75	21.1	-0.75	18.87%
Credit Spreads	12/31  Close	6/24    Close	Week Change	Simple YTD %
Inv Grade Credit Idx	4.78%	4.40%	-0.04%	-7.95%
Low Grade Credit Idx	8.32%	7.57%	-0.05%	-9.01%
Markit CDX Inv Grd Idx	85	99	-1.98%	16.47%
Markit CDX Mid Grd Idx	131	160	-1.23%	22.14%

Market Data: Week Ending June 17, 2011

Market Index	12/31  Close	6/17    Close	Week Change	Simple YTD %
Dow Industrials Avg	11,577.50	12,004.40	0.44%	3.69%
S&P 500	1,257.64	1,271.50	0.04%	1.10%
Fed Funds Rate	0.10%	0.11%	0.01%	10.00%
10 yr T-note Yld	3.29%	2.94%	-0.03%	-10.64%
5 yr T-note Yld	2.01%	1.53%	-0.03%	-23.88%
5 yr TIPS - 'Real' Yld	-0.06%	-0.46%	0.03%	-666.67%
Implied 5 yr Inflation %	2.07%	1.99%	-0.06%	-3.86%
2 yr T-note Yld	0.59%	0.37%	-0.03%	-37.29%
2-10 Yr Slope	2.70%	2.57%	0.00%	-4.81%
90 day T-bill Yld	0.12%	0.03%	-0.01%	-75.00%
Gold ($/oz)	$1,421.40	$1,539.10	$9.90	8.28%
WTI Oil ($/brl)	$91.38	$93.01	-$6.19	1.78%
VIX "Worry Index"	17.75	21.85	2.99	23.10%
Credit Spreads	12/31  Close	6/17    Close	Week Change	Simple YTD %
Inv Grade Credit Idx	4.78%	4.44%	0.03%	-7.11%
Low Grade Credit Idx	8.32%	7.62%	0.17%	-8.41%
Markit CDX Inv Grd Idx	85	101	3.06%	18.82%
Markit CDX Mid Grd Idx	131	162	1.89%	23.66%

Economic Condition Review: June 2011

The last economic review I did for the blog was in January 2011. At that time conditions for the US economy felt hopeful with corporations getting ready to announce good to great business results and guardedly optimistic business outlook messages. Food and energy inflation were an established factor in the US and the rest of the world. QE2 was adding fuel to inflation and to the prices for most commodities, especially the money hedges, gold and silver. The US$ was weakening, reaching a recent low near 73 (see graph below). A review of the weekly market data for January 14 is linked here. Company share prices elevated for much of the early part of earnings season before hitting a ceiling in mid February and suffering a March pullback in sympathy with Japan's enormous tragedy trio, earthquake, tsunami and nuclear power plant catastrophe's. The US markets recovered to the year-to-date high at the end of May.

Now in June, the world is captivated with concern about the bank and sovereign debt crisis in Greece. The concern is over the terms by which it will be resolved and when. The political forces are at work, the ECB, the IMF, and the US Fed are all applying pressure. The Financial Times describes the situation as "A Defining Moment for Greek Debt". A play on words since the article is about the definitions given to what everyone perceives to be a 'credit event' in Greek sovereign debt, involving credit default swaps. Eurozone forces feel the resolution is to deepen the austerity of the Greeks putting the problem on the back of labor as well as insisting that the government sell prime assets, such as state owned transportation and valuable land assets. Bloomberg describes the situation here. The proposals are being met with resistance from Greek labor unions. It remains to be seen how the government decides what to vote. Will they shun the political force representing the banking/eurozone interests or will they adopt an Iceland type reform to protect their assets from fire sale and force losses on the financial system. If they choose the latter, the potential exists for wide ranging credit related losses for European banks and possibly other money center banks around the world too.

The US Fed has announced they do plan to end QE2 as planned at the end of June. Until then, they are still in the markets supporting asset prices. A widely held view, that I share, is that there will be some form of market manipulation choreographed by the Fed until they get enough political support for the next QE. It will take a good financial scare to move the political will, so this is the time to be patient, waiting to take on risk. John Hussman writes that more QE will be politically aggressive in the face of a discouraged populace and critical global community. In addition, the lack of evidence that QE has been successful would support its abandonment. But the final decision likely revolves around the determination of Fed Chairman Bernanke to maintain the practice.

Residential Real Estate Priced in Gold

Here is a chart, from Chart of the Day, illustrating the long-term historical performance of real estate converted to gold. Yes, things have changed. It might appear that gold is nearing a peak in value and/or that real estate is near the bottom in its swoon. It could turn out to be that way, though there is a higher probability that the issues surrounding the US $ and other major currencies will dictate the rise and fall in gold. I share the opinion of others, gold goes higher. A lot higher.

Declining real estate prices continue to be a concern for investors. For some perspective on the magnitude of the decline in home prices, today's chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes a relatively low 106 ounces of gold to buy the median single-family home. This is dramatically less than the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down over 80% from its 2001 peak (to a level last seen in 1980) and remains well within the confines of a six-year accelerated downtrend and continues to close in on its 1980 trough.