Suffice it to say that this hasn't been
The Treasury Department's announcement last week of its buyback program and reduced financing plans compounded the volatility in a bond market that's already been a wild, unstable place this year.
Summers' comments to reporters yesterday, probably intended to clarify the Treasury's intentions, caused a similar reaction. The Treasury's tactics angered the market enough to cause a veritable buyers' strike at today's 30-year bond auction, one of the worst in recent memory.
"The people who are normally participating in these auctions are saying, 'I don't know what you guys are going to tell us next. The things you do don't make sense,'" said William Quan, senior economist at
Aubrey G. Lanston
. "All of the usual moves in the market have been increased substantially; the volatility has increased substantially."
It's not an isolated opinion. Some believe Summers' first blunder came last week, when the department released a truckload of information on its financing plans after giving only the barest of
details about its plans.
On Feb. 3, the department not only
said it plans to buy back up to $30 billion in longer-dated securities, it changed the make-up of the quarterly refunding schedule, including reducing new 30-year auctions to one a year. Within two days, the 30-year bond had rallied about 30 basis points on the prospect that those bonds suddenly would be in even shorter supply.
"The changes came more quickly than the Street was expecting," said Tony Crescenzi, chief bond market strategist at
. The Treasury "put
the market at risk by exposing dealers to bad trades. So many people have a certain assumption about the yield curve not being inverted that it wreaked havoc with so many models."
Yesterday, Summers told reporters, "I expect the Treasury to use the entirety of the yield curve as a way of holding down our borrowing costs."
"Thanks," came the market's sarcastic reply, as the 30-year bond swung the other way.
Now, the Treasury never explicitly stated it would eliminate the 30-year bond, although Undersecretary Gary Gensler did tell reporters he felt the market's focus would shift to the 10-year note. Some link the bond rally to a
New York Times
article last Thursday speculating that the 30-year would be phased out, as well as a general overreaction by the markets banking on less long-term issuance.
However, should the inversion of the yield curve persist, it raises stickier questions: Could the Treasury, seeing that buying back longer-dated bonds has suddenly become more expensive, retreat from its program? Also, now that borrowing costs are lower for 30-year bonds, could the Treasury increase its issuance in this sector?
Both are unlikely, economists say.
No Market-Timers Here
For one, the Treasury is not in the business of market-timing. Corporate issuers have the luxury of retooling a bond offering to garner cost savings from an unexpected rally, but the Treasury doesn't work that way. Besides, if the Treasury were to increase its issuance of 30-year bonds, the yield curve would quickly return to its positively sloped shape, as long-dated bonds carry more risk than short-dated notes.
As for rejiggering the buyback plan, that's a more likely possibility, but economists remain skeptical. Josh Feinman, chief economist at
Deutsche Asset Management Americas
, said that unless the political or economic climate changes, the Treasury has no choice. "What are they going to do?" he asks. "It's this, or pile up cash."
, in its weekly comment, sharply points out that the $30 billion figure is "not a firm target." The Treasury has only committed to a couple of $1 billion purchases in the 10- to 30-year range this quarter, which means the market, by rallying, is perhaps spending its paycheck a little early.
"If a continuing rally in off-the-run bonds undermines the rationale for the buyback program, the Treasury would either limit the size or shorten the average maturity of its purchases -- which in turn would undermine the rationale for a continuing rally in off-the-run bonds," says the report.
However, a rally was unavoidable, sources said. At some point, the Treasury would have had to release details of its exact plans -- and the securities targeted for buybacks certainly would have rallied. Steve Van Order, chief investment strategist at
Calvert Asset Management
, said the long-term cost savings are more important to the government than paying a concession to the market.
"There's still many issues out there with bigger than a 7% coupon," he said, including a couple with coupons higher than 11%, issued back in the mid-1980s. "By paying a premium today, they're still getting the value of cutting long-term interest costs in the U.S."
It's important to note that the yield curve inversion (in which shorter-dated securities have a higher yield than longer-dated securities) only happened last month, initially motivated by expectations of more
rate hikes. Once the Fed's tightening cycle ends, the yield curve could start to revert somewhat toward its usual shape.
Whether a statement by Summers will cause it all to happen in one hour remains to be seen.