Interest rates up in the US as investors choke on supply

The yield on U.S. Treasury securities shot violently upward for the third day as the U.S. Government prepares to raise hundreds of billions of dollars in defense of its banking system. Up until a few days ago, treasury yields sank as everyone piled in to U.S. government debt as a safe haven in nervous times.

However, in my opinion, the market is now waking up to the reality of the American government printing money like mad in order to avert a full-blown depression. Market demand is simply not large enough to absorb all of this paper. Interest rates have gone up as a result.

Ultimately, the irony of the Fed’s rescue attempts, which include a rate cut to 1.5%, is that interest rates may actually go higher throughout the U.S. economy as the Fed floods the system with printed dollars.

Treasuries fell for a third day as government sales of $50 billion in debt eased the shortage of U.S. securities sought as a haven amid economic turmoil.

Traders pushed yields on two-year notes to the highest in almost a week as Treasury Secretary Henry Paulson signaled the government may invest in banks. The Treasury sold $20 billion of 10-year notes to relieve shortages, in the second round of special sales announced yesterday. It also will sell $30 billion of bills.

“A quick $20 billion on top of what came yesterday is going to weigh on the market a little bit,” said Theodore Ake, the head of Treasury trading in New York at Mizuho Securities USA Inc., one of the 17 primary dealers that trade with the Federal Reserve.

Yields on two-year notes increased 13 basis points, or 0.13 percentage point, to 1.68 percent at 11:53 a.m. in New York, according to BGCantor Market Data. They touched 1.74 percent, the highest since Oct. 3. The 2 percent security due September 2010 fell 8/32, or $2.50 per $1,000 face amount, to 100 19/32. The yield on the 10-year note rose 13 basis points to 3.78 percent.

“A massive amount of supply will be coming in the next six to eight weeks, and this will be the concentration for the market,” said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest lender. “Anything else will take a back seat.”
–Bloomberg News