Jittery Bond Market Threatens President's Agenda

The Wall Street Journal - WASHINGTON -- Senior Obama administration officials said Friday that policy adjustments necessary to contain soaring budget deficits would be made once an economic recovery takes hold, in response to growing concerns about a run-up in long-term interest rates.

Treasury Secretary Timothy Geithner, National Economic Council chief Lawrence Summers and Office of Management and Budget director Peter Orszag said in separate interviews that the administration was acutely aware that rising interest rates pose a threat to the improving U.S. economy.
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Yields on 10-year Treasury notes have risen 1.5 percentage points this year as bond traders pull back amid worries about rising federal debt. Higher yields will leave the government with higher interest costs and still higher deficits. They could also push up other forms of interest rates, making borrowing more expensive for many people.

On Thursday, the Treasury Department is expected to announce an auction of roughly $65 billion in three-year, 10-year and 30-year notes and bonds, and the result will be closely watched.

"We're going to do what's necessary," Mr. Geithner said. "That's the only way you're going to get a strong, sustainable recovery." As soon as a recovery takes hold, the administration will reduce the deficit to a sustainable level, he said, adding, "That's difficult, but critically important."

Mr. Orszag said the administration's commitment to fiscal rectitude would become clear in coming weeks when President Barack Obama demands that any health-care plan drafted in Congress be fully paid for. That pledge, he said, "is ironclad, no ambiguity, not up for negotiation."

Additional steps on the deficit may become necessary, he added, and the administration is committed to turning to Social Security next.

"There is not a day that goes by that the president and the economic team do not focus on the long-term commitment to decrease the deficit," Mr. Summers said.

The comments by the administration officials were aimed at calming worries on Wall Street, and indicated concern that rising interest rates might imperil the president's domestic agenda, as they have done to the plans of previous Democratic administrations.

Some officials tried to play down market fears about federal borrowing. The jump in long-term interest rates, both in Treasurys and mortgages, is more a product of technical factors, they argue, than a reaction to Washington's borrowing.http://online.wsj.com/article/SB124364263595268139.html

Bond Yields May Signal a Recovery

The gap between short- and long-term Treasury rates is approaching a record as the U.S. economy shows signs of recovery and the government floods the market with new debt.

The gap between two- and 10-year Treasury yields was as wide as 2.360 percentage points at one point Tuesday, the most since the 2.619 points hit in November and nearing the August 2003 peak of 2.747 points. The gap ended Tuesday at 2.352 points, as the 10-year note fell 9/32 point, or $2.8125 for every $1,000 invested, to 99 to yield 3.243%, while the two-year note rose 1/32 point to 99 31/32, lowering its yield to 0.891%. Prices and yields move inversely.
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Strategists said the gap could exceed three points. Two-year yield is expected to remain anchored by the Federal Reserve's interest-rate target of 0% to 0.25%. But the yield on the 10-year note is expected to rise amid a surge of new government debt and as investors sell existing government debt as they look to move out of these safe investments. Until the Fed starts to reverse its stimulative monetary policies and starts raising interest rates, the curve is likely to remain steep.

Investors profit from a steepening yield curve by buying two-year notes and selling 10-year notes. The steeper the curve, the bigger the profit potential. Banks benefit as they can borrow funds at cheap short-term rates and invest in higher-yielding long-term assets.http://online.wsj.com/article/SB124274038273134537.html

Yield curve explained: http://en.wikipedia.org/wiki/Yield_curve

China Slows Purchases of U.S. and Other Bonds

The New York Times - HONG KONG — Reversing its role as the world’s fastest-growing buyer of U.S. Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released this weekend by China’s central bank.

China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years. For the quarter, the reserves edged up $7.7 billion, compared to a record increase of $153.9 billion in the same quarter last year.

The main effect of slower bond purchases may be to weaken Beijing’s influence in Washington, by lessening the reliance of the U.S. Treasury on Chinese central bank purchases at its government bond auctions. Chinese officials from Premier Wen Jiabao on down have expressed growing nervousness over the past two months about their country’s huge exposure to America’s financial well-being.

Private investors from around the world, including the United States, have been buying more American bonds in search of a refuge from global financial troubles. This has made the Chinese government’s cash less necessary and kept interest rates low in the United States over the winter despite the Chinese pullback.http://www.nytimes.com/2009/04/13/business/global/13yuan.html

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