Today's Treasury auction of 5 yr notes - 4.569 % - Treasury yield

Some 9 basis points (0.091%) less than the 2 yr note at 4.660 % the day before.

Details here.

Note the ratio of the offered vs. accepted - expressed in thousands of $.

"Bid-to-Cover Ratio = 38,454,766 / 14,000,134 = 2.75"

A lot of the 'heavies' out there with their competitive bids found the interest return acceptable for their purposes.

Also, the stats on the info page above show just how almost insignificant our 'small boys and girls' Treasury Direct noncompetitive transactions are in affecting the awarded rate. Of the non Federal Reserve portion of the award, some 14 billion, about 100 million was from Treasury Direct.

Note the following comment in the above linked page re: accrued interest.

"Accrued interest of $ 0.24725 per $1,000 must be paid for the period
from September 30, 2006 to October 02, 2006."

I'm not familiar with the addition of accrued interest on Treasuries. I -> assume <- that the final amount to be debited from one's TreasuryDirect account would be based on the stated 99.694413 price plus the $ 0.24725 equaling a price per thousand of $997.19138? Not questioning the math here; rather, the process. In other words, is it the same process as in other non-Treasury debt issues.

edit added -

By the way, if you would like to get Public Debt Notices sent directly to your email In-Box on your pc, this is the place to set it up.

As of the time of this posting, there are 13 FHLB issues listed on the Fidelity website, with maturities from 2/2007 to 10/2021, and settlement dates in October, next month. Thus, 'doable' if you have a Fidelity account in place, or other acquisition methods available to you to make buys of new FHLB issues. You will need to do some clicking to get to the inventory page - first on the "Learn more" hot link under the red 'Open market' seal, then the "Find Individual Bonds" link, then, under the "Agency / GSE" section, the "New issue" link. That should do it.

Remember, the FHLB interest is usually considered to be state and local income tax free - check with your personal tax guru, etc etc. So those of us in states with state and local income taxes will realize higher tax equivalent yields.

And please speak up in this thread if you have info re: the state and local income tax status of FHLB issues to the contrary of the opinion mentioned above.

I have no personal financial interest with the enterprise that owns Fidelity.

Thanks.

PS: since the beginning of typing this post, 2 issues have dropped off the list - now 11 entries.

mariojm said:For instance, if we invest in mortgage-backed GSEs and the "housing bubble" bursts, should we be worried?

I agree, but would slightly change the wording ... if/when investors in mortgage-backed GSEs (or their many derivatives/tranches) get worried, the housing bubble will be truly over.

Frankly, I think the spread between "sovereigns" and "agencies" is much, much too narrow and does not compensate for the risk differential. There will be a narrow window of opportunity between the 2006 mid-term elections and the 2007 ramp-up of the next presidential cycle for changes to Fannie and/or its oversight. I don't have either the clairvoyance nor cojones to make any mortgage-backed bets with that looming out there.

TIPS re-opening - tentative

According to the upcoming auctions posted here, a re-opening of a 10 yr TIPS is coming up next week with the auction to be on Thursday, 12 Oct.

mariojm and any others, do you have any assessment of this re-opening - value wise?

Thanks.

As mariojm posted here , the interest rate received for the 9-yr 9-mo TIPS auctioned on October 12 was 2.426 % . More complete info for this auction can be seen at http://www.publicdebt.treas.gov/of/releases/2006/ofm1012061.pdf here .

One can receive the notices for upcoming auctions and the auction results by email. Subscribing to these announcements can be done at http://www.treasurydirect.gov/maillist/maillist.htm here.

There is an expected announcement of a 5 yr TIPS note to be made on Thursday, Oct 19.

During next week - October 23 - 27, there are FIVE opportunities to acquire US Treasury issues at auction.

- - 91 and 182 day Bills; 2 and 5 yr Notes; and a 4 yr 6 mo TIPS re-opening.

Note the earlier close of auctions for Treasury Direct participants for these Bills - to be at 11:00 ET.

There is a FW thread that addresses the Treasury Bills offerings here, and a thread to assist in understanding TIPS securities here.

A convenient place to get more auction info is here, ( at http://www.treasurydirect.gov/RT/RTGateway?page=institHome ) and then, in the box on the right of the page, click on the "Upcoming Auctions" tab to see the schedule. By clicking on a type of security ( ex. 2 yr Note ), you can view the auction details for that item.

For new readers of this thread who reside in states with state and local income taxes, remember that the interest for these Treasury securities is free from state and local income taxes. Do check-out the info on this non-taxable factor in the beginning of the 'treasury bills rate thread' mentioned above. You will find excellent information there including references to calculators which can be used to derive the equivalent fully taxable interest rate for comparison purposes.

Interesting observation, tb00957. Worst case you have yourself a state tax free "6% 10-year CD." I'm not sure if it will get called, though. 10-year yields are very low right now and if they rise, you'd assume that it wouldn't get called because new issues would have even higher yields. (and you might be missing out on higher yields then also) I think it would only get called if the economy tanks. I think you'd have to do this with the commitment in mind that you'd be ok with 6% return on that money for 10 years. But right now this would be a very good return for the risk incurred, and as you say much higher than Treasury. (I think the reason for this is that the credit risk of anything but the Treasury is seen as higher for longer term commitments.)

The yield on today's auction of the 4 yr 6 mo TIPS note was 2.691 %.

The details are here or at http://www.publicdebt.treas.gov/of/releases/2006/ofl1023061.pdf .

The "Bid-to-Cover ratio" was 2.89% with slightly more than 34% of the competitive bids accepted.

tb00957 said:Yield on 10-year treasury may rise in the next 6 months but we haven't seen it go above 5.5% for more than 5 years. I don't think it will go up that fast when people are talking about Fed done or easing. Anyway, I will sit out on this one because I don't have cash for it. Food for thought.

Good point.

And, how about this perspective - if investors in fixed income issues (government and private) believe that based on the last several years of the Federal Reserve 'performance' in 'dealing with' the economy and inflation, that inflation is not expected to be an 'out-of-control' factor in the 10 year time frame, could it be that the present rates for that time period might well reflect an investment reality of lowered out-year inflationary risks and hence, lowered rates of return?

I do realize that there are many factors which enter into investment decisions and show up in the market, and anticipated inflation in the US of A is only but one. It does seem that a lot of 'big money' decision makers are investing at the current 10 yr 'low' interest rates. And maybe us little guys and gals should not ignore such 'big money' investments as we look for insight for our personal investments.

I do admit though that looking at the current yield curve, being so different from the 'classic' curve with a steady rising interest rates in the out years, an 'old-timer' might feel uncomfortable in trying to believe that such the typical rising curve won't return . . . sometime soon.

. . . the wonder of it all!



Given the title of this topic, comments are most welcome.

Thanks.

1ofushere said:tb00957 said:Yield on 10-year treasury may rise in the next 6 months but we haven't seen it go above 5.5% for more than 5 years. I don't think it will go up that fast when people are talking about Fed done or easing. Anyway, I will sit out on this one because I don't have cash for it. Food for thought.

Good point.

And, how about this perspective - if investors in fixed income issues (government and private) believe that based on the last several years of the Federal Reserve 'performance' in 'dealing with' the economy and inflation, that inflation is not expected to be an 'out-of-control' factor in the 10 year time frame, could it be that the present rates for that time period might well reflect an investment reality of lowered out-year inflationary risks and hence, lowered rates of return?

I do realize that there are many factors which enter into investment decisions and show up in the market, and anticipated inflation in the US of A is only but one. It does seem that a lot of 'big money' decision makers are investing at the current 10 yr 'low' interest rates. And maybe us little guys and gals should not ignore such 'big money' investments as we look for insight for our personal investments.

I do admit though that looking at the current yield curve, being so different from the 'classic' curve with a steady rising interest rates in the out years, an 'old-timer' might feel uncomfortable in trying to believe that such the typical rising curve won't return . . . sometime soon.

. . . the wonder of it all!



Given the title of this topic, comments are most welcome.

Thanks.

Very interesting discussion. Of course nobody really knows where future 10-year rates will go (otherwise they could get rich off of that information), but here are some components of the rate we can examine:

(1) a risk-free real rate (the return at which investors are willing to give up their money to buy a bond)
(2) an expected average inflation over the life of the bond
(3) a credit risk premium (for taking the risk that the bond cannot be repayed)
(4) an inflation risk premium (for taking the risk that actual inflation is higher than expected inflation)

Both the credit risk and interest risk are usually higher, the longer the maturity of the bond. This is because we can forecast credit rating and inflation better for the near term than long term. (Treasuries are special in the sense that the credit risk is almost zero and does not increase with maturity. If you look at other yield curves, i.e. corporate or even agency, they seldomly revert.)

Now, how about average inflation and the associated risk premium? It should certainly be low if the market trusts the Fed will do everything it can to fight future inflation. With Bernanke's specific inflation targeting plans, this certainly seems like it might be true. Indeed if you examine the average inflation implied by subtracting the actual and real yield curve, expected average inflation (plus the risk premium) is currently 2-2.5% for a sustained period of time.

But, you could argue that expected inflation would also have been low under Greenspan. If you look at CPI data, after Greenspan became Fed chairman, there was an unprecedented steadiness of inflation. So I don't see any major changes between future inflation expectations now vs. in the 90s, for example.

Which leaves the risk-free real rate. What that one depends on is difficult to argue. Perhaps it's tied to how well the economy is doing, i.e. if stocks are giving high returns, there would be less demand for bonds, so risk free real rates should be higher. Fact is that real rates right now are still very low as compared to the recent past (before the last recession). Here is a graph I found on the real rates for short and long term bonds in the last 30 years. (Essentially these are the nominal yields minus the actual inflation rate at the time.) As the graph shows, these are currently quite low as compared to 4-5% in the 90s for longer bonds. Shorter bonds are on track (which makes sense if you think about how flat the curve is), but if history is a guide, the real yield on long bonds should rise further.