Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
How to Play Interest Rates in US Real Estate - 20th Aug 19
Stocks Likely to Breakout Instead of Gold - 20th Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 20th Aug 19
Holiday Nightmares - Your Caravan is Missing! - 20th Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Crumbling U.S. Treasury Bond Market Suggests Spike in Interest Rates 2010

Interest-Rates / US Bonds Dec 18, 2009 - 10:22 AM GMT

By: Mike_Larson


Best Financial Markets Analysis ArticleThe holiday season is here — and in just a couple of weeks, 2009 will fade into the history books. I truly hope that you and your family enjoy these happy times.

But before I sign off for the year, I feel obligated to address one of the biggest threats to your wealth that’s looming in 2010. I’m talking about the very real prospect of “failed” Treasury auctions, plunging bond prices, and a big spike in long-term interest rates.

We touched on this issue briefly a week ago. But this time, we’re really going to get our hands dirty!

The Warning Signs Are There. Please Don’t Ignore Them!

Each and every week, the U.S. government sells Treasuries to fund its operations. Four-week bills. Three-month bills. Six-month bills. One-month bills. Two-, 3-, 5-, 7-, and 10-year notes. And of course, the granddaddy of them all, the 30-year Treasury Bond.

The Treasury auctions offer those securities to all kinds of bidders — individual investors, banks, insurers, pension funds, mutual funds, and foreign central banks are among them.

The more aggressive the bidding, the lower the yields Treasury has to pay on the securities it sells. And the lower the yields, the lower the U.S. government’s financing costs.

When buyers are aggressive, Treasury can  get away with paying lower yields.
When buyers are aggressive, Treasury can get away with paying lower yields.

For a while, the Treasury Department was able to sell almost anything and everything at rock-bottom yields. It didn’t matter if it was the shortest of short-term bills or the longest of long-term bonds. Investors were willing to pay up. That helped keep our cost of borrowing low and underwrote the massive deficit with little-to-no financial pain.

But now that’s starting to change.

Slowly but surely, investors are beginning to appreciate the seriousness of the dangers we highlighted many months ago. All the mega-bailouts … all the Fed money-printing … all the fiscal recklessness being practiced by both Democrats and Republicans alike are starting to spook bond market players.

Sure, they’re still buying very short-term Treasuries like mad. It’s not like the government is going to default tomorrow, or that inflation is going to surge overnight. But auctions of 10-year and 30-year bonds are getting progressively worse, with demand dropping as supply ramps up …

Weak Auctions a Prelude to Failed Ones?

One key measure of auction strength is the “bid-to-cover ratio.” This measures the dollar volume of bids versus the volume of Treasuries being sold. The higher the number, the more demand you have relative to supply.

At the last 30-year bond auction, held on December 10, the bid-to-cover ratio came in at 2.45. That was substantially below the recent peak of 2.92. The 10-year note auction, held one day prior, registered a ratio of 2.62. That too was sharply below the recent high of 3.28.

Another way to gauge auction strength is to see who’s doing the buying …

The number of central  banks buying Treasuries has declined drastically.
The number of central banks buying Treasuries has declined drastically.

If you have a high percentage of notes and bonds going to so-called “indirect bidders,” you can breathe a sigh of relief. That’s because important buyers like foreign central banks fall into that category, and we desperately need them to step up to the plate to keep rates low.

Unfortunately, the numbers don’t look good there, either. Indirect bidders only took down 40.2 percent of the 30-year bonds sold in mid-December. That was down from the 2009 peak of 50.2 percent in July. Their share in the 10-year auction was even worse — just 34.9 percent. As recently as September, indirect bidders were snapping up 55.3 percent of the notes being sold.

Bottom line: Long-term Treasury auctions are getting weaker and weaker.

We haven’t seen a so-called “failed” auction yet. That’s when the bid-to-cover ratio drops below 1 — meaning the government can’t even get $1 in bids for every $1 in securities being sold. But that has already happened in the U.K., and I believe it’s only a matter of time before it happens here.

Defensive Measures to Take …

If you’re a defensive investor, your course of action is simple: Avoid long-term Treasury debt. Don’t put in bids for long-term notes and bonds via the Treasury Direct system or through your broker, and consider selling whatever long-term holdings you already own.

That strategy is one I’ve been advocating for a long time. And boy do I hope you’ve been listening! Just consider this: If you purchased the iShares Barclays 20+ Year Treasury Bond Fund (TLT), an exchange traded fund (ETF) that owns long-term Treasuries, at the end of 2008, you would have already lost more than 20.5 percent! That INCLUDES interest payments, by the way.

As a matter of fact, 2009 has been the absolute WORST year for total return on long-term Treasuries since at least 1973. That includes dismal years such as 1994 and 1999, which occurred during Fed rate-hiking cycles.

Until next time,


This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Ron S.
19 Dec 09, 03:40
Thank you for explaining Treasuries!

There are many people, like myself, who have limited understanding of economics, and finance, in general. Details of how the Government finances it's expanding debt have been particularly hard for me to find. Your brief explanation regarding Treasuries and the auctioning process is one of the best I've read, anywhere. Thank you so much.

Ron S.

Spokane, WA

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules