Wednesday, November 30, 2011

Is Holding Treasury Auctions on 39 Separate Days During The 1st Quarter Risky Business?

The bid failure at the debt auction in Germany on November 23rd demonstrates that there are limits to the demand even for "safe" government debt. So far, demand has remained strong at the debt auctions held by the U.S. Treasury. However, the increasing frequency of Treasury debt auctions increases the risk that at some point the U.S. could also face demand softening for its sovereign debt. The Treasury is tentatively scheduled to hold bill, note, or bond auctions on 39 separate days during the first quarter. The frequency of the debt auctions is in large part due to the need to issue $541 billion in marketable securities in order to fund the rapidly growing U.S. debt. The debt is already $15 trillion and the failure of the Deficit Super Committee has made it crystal clear that Congress has no intention of holding the deficit below $1 trillion in 2012.

There is barely an open day on the schedule that does not include Treasury auctions. Given that auctions are only held on non-holiday Monday through Thursday, the 39 days on which debt auctions are scheduled only leaves 8 open days on the schedule. The January debt auction schedule is so crowded that January 5th is the only non-holiday Monday-Thursday during the month on which a debt auction is not scheduled. There are only 2 open days on the schedule in February (15th and 29th), and 5 open days in March (1st, 7th, 8th, 15th, 21st).

Holding Treasury auctions on 39 out of the 47 non-holiday Monday-Thursdays during the first quarter of 2012 means that on more days than not the U.S could suffer from a bid failure. While it may be a bit premature to warn "buyers beware", the capability of the U.S to sell sovereign debt at record low rates will not last forever.

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