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Weak Demand at Long-Term Treasury Auction

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The Treasury Department saw the weakest demand since August 2011 in a sale of 30-year Treasury bonds today. The demand for long-term bonds that has driven interest rates well below the old benchmark of 8% has been the rise in demand for pensions. As the Baby-Boomers were getting closer to retirement, the bid for “safe” lock-it-in long-term yield kept rising. The Fed cannot control the long-term rates and hence tries to influence them indirectly – ie buying in mortgage debt. I warned before with QE1 and QE2 that the Fed was making a very serious mistake buying in the 30 year debt trying to increase the demand for long-term to support the mortgages. China said thank you and sold its long-term holdings in QE1 and QE2.

The weak demand for 30 year Treasurys reflects the entire problem with debt markets. Pensions go broke at these yields and are being forced into corporate debt and shares. This is one reason why the US share market remains in a good position long-term despite the herd of analysts calling for the Great Crash.

The greatest question we have that must be answered soon, will be what do we see 2015-2020? If we have a full-blown Sovereign Debt Crisis with municipals collapsing and sovereign debt in a crisis in Europe, capital will shift to the private sector. At some point we will see the FLIGHT TO QUALITY shift from government bonds to private sector assets. This will result in stocks rising rather than bonds.

Will will most likely have one more correction and that will not be too steep. But it will be a buying opportunity. We have to understand capital flows for things change depending upon where confidence moves.