Monday, October 26, 2009

Get ready for a sharp curve steepening

The US Treasury has been issuing enormous amounts of bills to finance the administration's efforts, keeping the average maturity of debt low. But it's all about to change:

Bloomberg: After selling $1.9 trillion of short-term securities to finance President Barack Obama’s efforts to end the worst recession since the 1930s, the Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26- year low of 49 months. That may mean boosting sales of 10- and 30-year bonds by 40 percent over the next year to $600 billion, according to FTN Financial in Memphis, Tennessee, driving down prices of longer-term securities.

The Treasury is thinking that while the demand is high, let's term out as much debt as possible. The US government has effectively taken a 4-year mortgage from the world and is about to try rolling it into a much longer mortgage.

But this increase in duration will coincide with the winding down of the Fed's securities purchase program and will create a spike in longer term treasuries' supply. We may soon be facing a sharp curve steepening in treasuries, possibly the largest in recent years.
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