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Obama on the Recession, Fed’s Beige Book, Treasury Auction Results

President Obama says US may be seeing beginning of end of recession -DJ
Sure, and the emperor was wearing clothes…

ECONX Summary of Fed’s Beige Book Reports suggest that economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level….

Amidst all the positive recession-ending talk looms the dark clouds of a weakening Treasury bond market. As the Beige Book illustrates, the pace of economic decline has slowed but not stopped; in order for any recovery to actually gain traction interest rates must remain low.

The Obama administration’s economic policies may be the undoing of his proclamation that the recession end is near. Allow me to explain. Apparently the Administration is employing a very scientific two-pronged approach for economic salvation: 1) If you close your eyes and say ‘the recession is ending’ enough times it will come true. We will call this the Oz method. 2) With your eyes closed, spend like a drunken sailor.

The problem with this brilliant technique is first, closing your eyes and wishing only works for little girls with pigtails and second, excessive spending leads to a rise in interest rates. The conundrum: spend to get out of the recession but spending leads to Treasury bond weakness/rate increases. The real estate situation in this country remains dire and an increase in mortgage rates will re-accelerate the economic decline.

Our job as investors remains precarious as this equity rally continues to pick up steam. We must monitor the conundrum by paying close attention to Treasury bond auctions. Weakness in these auctions creating interest rate creep will be telling signs of trouble to come.

To that end, I will be periodically posting data from various auctions of government debt. Keep a close eye and look for troubling trends.

Tuesday
Briefing: 10-Yr:+09/32..3.684%.. USD/JPY:94.5545.. EUR/USD:1.4170
Mixed on Air, Supply: The early bond rally skidded to a halt and prices backed off to new lows on the heels of a good, but not good enough, record $42B 2-yr auction, with added drag coming in front of record 5-and-7yr auctions hitting tomorrow and Thursday….

And then Wednesday


Briefing: ECONX 5-year Note Auction Results: High Yield 2.689% (2.635% expected); Bid/Cover 1.92x (2009 Avg 2.22x); Indirect Bidders 36.7% (2009 Avg 41.9%)

Slammed: Treasuries were flipped on the poor showing on the record size 5-yr auction, which, even as the bar was set a bit lower after yesterday’s only OK offering. The market saw a high yield of 2.689% against the when issued 2.635% while the cover’s sub-2.00 demand measure, at 1.92, was ugly and the indirect bidder take was about half of the last outing and also under the year’s average. The poor showing really puts a glaring spotlight on tomorrow’s already suspect and oddball record 7-yr, with the thinking that if “popular” issues such as 2s and 5s are not up to snuff, the 7s will probably be truly ugly. The 5-yr went to a 2.706% yield from 2.601%, while the 10-yr swung to 3.731% from 3.63% in a flash. The 7-yr just gave up and was clobbered to add nearly 12 basis points to its yield.

Previous offering saw $37B, 2.7% yield, with a bid-to-cover of 2.58x and an indirect bidder participation rate of 62.8%.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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