Don't trust me. Ask Greenspan

The bond market is voting on BamCare and it isn't all that gleeful.

Treasuries fell, pushing 10-year note yields up the most since December, as lower-than-average demand at $118 billion in note auctions raised concern that investor interest is waning as the deficit climbs to a record.

U.S. interest-rate swap spreads plunged to the lowest levels in more than two decades as investor focus shifted from the plight of financial institutions to the ability of nations to finance rising fiscal deficits. Bill Gross, manager of the world’s biggest bond fund, said the almost three-decade bond rally may be ending. Two-year notes dropped for a fourth week in the longest stretch of decreases since August before next week’s March payrolls report.

“Supply and the realization that there is more to come is starting to weigh on Treasuries,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Swap spreads turning negative forced investors to cover shorts and dump Treasuries going into the auction, exacerbating the weakness.” A short is a bet that a security will decrease.

The 10-year note’s yield rose 15 basis points, or 0.15 percentage point, to 3.85 percent, according to BGCantor Market Data. The price of the 3.625 percent note due in February 2020 decreased 1 7/32, or $12.19 per $1,000 face amount, to 98 5/32. (more....)

So what do we make of this information? Let's ask Alan Greenspan.....

Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.

Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”

“I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. 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.”

The yield on 10-year Treasury notes was 3.85 percent at 3:08 p.m. in New York, down three basis points from late yesterday and up from 3.69 percent at the end of last week.

U.S. interest-rate swap spreads declined to the lowest levels on record this week, reflecting investor concerns about the ability of nations to finance rising fiscal deficits.

The rate to exchange floating- for fixed-interest payments for 10 years fell below the comparable-maturity Treasury yield for the first time on March 23. The swap spread reached as low as negative 10.19 basis points yesterday before reaching negative 7.63 basis points.

Record Deficit

The U.S. budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package.

“I don’t like American politics and what’s happening,” Greenspan said.

Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”

Hey we'll just print more money.

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