The bank mob “The difference between the Mafia and bankers? Bankers are better coiffed, but the motivation is often the same.” Dan Nardello, founder of the multinational investigative firm Nardello & Co., who grew up in Brooklyn, alongside gangstersCHERYL RAVELO
The U.S. Treasury is stepping up to the trough again this week as its seemingly insatiable demand for cash continues, but while short-term interest rates remain dirt cheap, long-term borrowing costs are on the rise.
Today, the government plans to sell $44-billion (U.S.) in two-year notes, which will be followed by an auction of $41-billion in five-year Treasuries tomorrow and $31-billion in seven-year bonds on Thursday.
WHAT ARE THE EXPECTATIONS? "The market continues to chew its way through [the issuance]and has encountered few problems," said Eric Lascelles, the chief economics and rate strategist with TD Securities Inc. "So far it has worked miraculously well and there's no denying it."
Foreign buyers of U.S. Treasuries, such as China, have largely kept to the short-term end of the securities market, but there are plans by the government to lengthen the average due date of its outstanding debt to 72 months from a 26-year low of 49 months, according to Bloomberg News.
"The quandary governments find themselves in is that it's disproportionately cheap to borrow at the short end," Mr. Lascelles said. The two-year yield on U.S. Treasuries is 1.03 per cent, compared with 3.57 per cent for 10-year bonds and 4.38 per cent for 30-year bonds. (The 10-year and 30-year bond yields have risen almost one-fifth of a percentage point during the past five days.)
Nevertheless, the U.S. government might want to start locking in the long-term rates before they rise too much.
HOW WILL THE MARKET REACT? In order to extend the term of the outstanding debt to the target, the government might boost sales of 10-year and 30-year securities by 40 per cent over the next year to $600-billion, according to Bloomberg, citing a report by Tennessee-based FTN Financial. That would push prices down and interest rates up.
"It's an open question as to how serious the government will be, but it's a plausible bet," Mr. Lascelles said. However, one of the considerations the government will make is that the U.S. mortgage market is linked to the 30-year Treasury yields and there continues to be an incentive to hold mortgage rates down.
On Thursday, the U.S. Federal Reserve Board is scheduled to end its program under which it will have purchased $300-billion in U.S. Treasuries, which formed part of its strategy to keep borrowing costs in check.