Critical Treasury auctions coming up

As U.S. Cruises Toward the Debt Ceiling, Telling Auctions Are Due This Week

provided by The Wall Street Journal

Gathering concerns about slowing U.S. growth have investors seeking safety in Treasurys, masking fears in that market about the U.S. fiscal morass—and leaving investors at loggerheads over how to position themselves.

Investors are well aware of the burgeoning U.S. debt load and the impending Treasury refunding auctions that will be announced next week. Those auctions in May will bring the nation near its current legal debt limit. But most are hesitant to act on those fears.

Bond-fund manager Michael Mata said the struggle over how to trim the U.S. debt and raise the debt ceiling has become a “game of chicken” between Democrats and Republicans, but with repercussions that are hard for any investor to imagine, let alone position for.

“It’s almost inconceivable that they won’t raise the debt ceiling,” said Mr. Mata, who manages the ING Global Bond Fund, with more than $500 million in assets. “It would be a bizarre situation, and the market would implode.”

Some say all the political posturing could take the debate down to the wire, which likely will cause spurts of selloffs along the way. Others believe the recent debt focus will only help Treasurys down the line, since reduced fiscal spending hurts growth in general, and that takes a toll on riskier assets such as stocks.

Turning up the heat, the U.S. Treasury’s May refunding announcement is due Wednesday. Issuance sizes are expected to be $32 billion in three-year notes, but, more important, $24 billion in 10-year notes and $16 billion in 30-year bonds.

That bout of supply, scheduled for auction in the second week of May, would push the government perilously close to the $14.3 trillion debt limit. The Treasury Department has said the U.S. will reach its debt threshold by May 16, with potential for a technical default in early June if Congress fails to act.

Eyes will be on the latter two sales of longer-date bonds, whose investors stand to lose the most if U.S. credit deteriorates. Longer-dated Treasurys are expected to endure the heaviest selloff the longer Congress waits to act.

Already, the seven-year note sale last Thursday attracted surprisingly tepid demand. For the first time in two years, dealers were forced to take down more than half the offering. Still, U.S. debt is regarded as the safest of all safe-investment harbors, even after Standard & Poor’s slapped the nation’s credit with a “negative” outlook April 18.

The startling news sent yields soaring, but only for a moment. Treasurys have since more than recovered, with benchmark 10-year notes Friday yielding 3.298%, from as high as 3.451% on the day the negative outlook was announced. With bonds, yields move inversely to price. Soft U.S. economic data also has helped drive yields on 30-year notes to their lowest levels since mid-March.

Jim Sarni, managing principal at Payden & Rygel, says U.S. government debt remains the main beneficiary when investors seek a secure place—even when U.S. debt is part of the problem.

“Despite all the fiscal dilemma we’re facing, you’re trying to reconcile that with fundamentals” of lackluster economic data, Mr. Sarni said. “When you put all that into a sifter, what comes out is uncertainty. And uncertainty translates into a flight to quality.”