Former Federal Reserve Chairman Alan Greenspan warns that the spike in Treasury yields is a “canary in the mine” that may foreshadow higher interest rates, as investors have avoided three major Treasury auctions this week.
Prices of U.S. government debt fell on Thursday following a weak auction of $32 billion in seven-year Treasury notes. The high yield on the auction came in at 3.37 percent, above the market's expectations, according to market data.
Thursday's auction capped a week of $118 billion in new supply which attracted dismal investor interest. The government has been auctioning a steady stream of bonds for months to fund its economic stimulus efforts.
The higher yields indicate investors’ fears about a “huge overhang of federal debt which we have never seen before,” Greenspan told Bloomberg. “I’m very much concerned about the fiscal situation,” he said.
Greenspan said an increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
Thursday, benchmark 10-year Treasury notes fell 13/32 in price to yield 3.93 percent, the highest since June 11 and up from 3.86 percent at Wednesday's close. The yield of the 10-year note is linked to interest rates on mortgages and other consumer loans. A drop in prices sends yields higher.
The seven-year note dropped 11/32 to yield 3.35 percent, up from 3.29 percent on Wednesday, Reuters reported.
Testimony from Federal Reserve Chairman Ben Bernanke that affirmed his pledge to keep interest rates near zero for an extended period did little to sway investors.
Economists say there is a looming sense of financial disaster in the wake of President Barack Obama’s landmark — and expensive — healthcare overhaul.
Worries about government bonds issued by Greece and Portugal contributed to investors' wariness of sovereign debt Thursday, analysts said.
If demand for U.S. debt continues to weaken, experts say the government would be forced to pay higher interest rates to lure investors. Prospects that the $940 billion healthcare plan could add to the massive U.S. deficit would make the nation's debt less attractive to investors because of an increase in supply and less fiscal stability.
Most auctions so far in 2010 have attracted strong demand. Experts say a few lukewarm auctions don’t mean that demand will continue to evaporate. An auction Tuesday of $44 billion in two-year notes also saw demand slip from earlier in the year.
Investors showed little interest in the Treasury Department's $42 billion auction of five-year notes Wednesday, which also pushed Treasury higher and prices lower.
The Treasury Department said that the February deficit totaled $220.9 billion, 14 percent higher than the previous record set in February of last year. The deficit through the first five months of this budget year totals $651.6 billion, 10.5 percent higher than a year ago.
The Obama administration is projecting that the deficit for the 2010 budget year will hit an all-time high of $1.56 trillion, surpassing last year's $1.4 trillion total. The administration is forecasting that the deficit will remain above $1 trillion in 2011, giving the country three straight years of $1 trillion-plus deficits.
The administration says the huge deficits are necessary to get the country out of the deepest recession since the 1930s. But Republicans have attacked the stimulus spending as wasteful and a failure at the primary objective of lowering unemployment.
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