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Supply matters in Treasurys

June 10, 2009

If there was any question, Wednesday’s auction of $19 billion Treasury 10-year notes shows that supply matters. The reopened notes priced with a yield of 3.99%, up steeply from the 3.19% yield on the notes issued just one month before.

The spectacular rise in Treasury yields in recent weeks has caused a round of speculation that the U.S. economy is on the cusp of recovery. Earlier this week, talk grew louder that the market was signaling a rate increase from the Federal Reserve.

And why not: the most recent jobs data came in better than expected, appetite for riskier assets has boosted everything from corporate debt to stocks, and some U.S. financial institutions are standing on their own two feet.

Under normal circumstances, these would be perfectly good reasons for getting ready for a sunnier outlook, but times are still anything but normal.

Instead, yields are more in line with the cold hard reality of the mess we’re in. During the height of the global meltdown, Treasurys served as a depository for funds looking for a safe haven. But that’s reversed as the trillions of dollars pumped into the financial system to support everything from mortgage-backed securities to troubled banks did the job of keeping the much feared apocalypse at bay.

Now, Treasury has to pay up and by extension, consumers who face higher finance costs on debt, including home loans. That is unless higher yields help undo the government’s best efforts to shore up the economy, and investors turn tail back into Treasurys.

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