In new twist, bond auctions rock stocks
By Nick Godt, MarketWatch
Last update: 5:18 p.m. EDT March 26, 2009
NEW YORK (MarketWatch) -- Treasury bond auctions, not usually the stuff that fires up equities traders, rocked stocks this week as investors homed in on worries about the ability of the government to borrow more than $2 trillion to fund its financial and economic rescue plans.
"Everybody knows that the government is auctioning stuff like there's no tomorrow," said Paul Nolte, director of investments at Hinsdale Associates.
"The question is who's going to buy all this stuff,"
Nolte said.
"If there's not enough buyers, interest rates will have to go higher, which means mortgage rates would have to go higher and that could derail any recovery we might have."
Treasury bond yields, which move inversely to bond prices, are used to benchmark the interest rates on many consumer loans, including some mortgages. The higher the yields, the more attractive bonds are to investors. But steeper yields also mean the government is paying more to borrow money.
Concerns that yields might have bottomed for now, making it harder to attract investors to fund government spending, partly fueled the nervousness seen on Wall Street over the past two sessions.
The bond market took a hit Wednesday after the U.K. failed to get enough bids to sell the full amount of 4-year gilts it offered, the first time this happened in 14 years.
Also weighing on bonds, a U.S. government auction of $34 billion of 5-year notes drew tepid interest from foreign investors. See Wednesday's bond report.
The news brutally undercut a ongoing rally in stocks. The Dow Jones Industrial Average ($INDU:
Dow Jones Industrial Average
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Last: 7,924.56+174.75+2.25%
4:30pm 03/26/2009
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$INDU 7,924.56, +174.75, +2.3%) lost a 200-point advance to fall by 80 points, before ending higher on a late reversal.
But Thursday saw the opposite reaction. The government received decent demand when it sold $24 billion in 7-year notes. See Bond report.
"The auction went better than we thought," said Jack Ablin, chief investment officer at Harris Private Bank. "We've had a dramatic mood swing."
The news helped fuel an ongoing rally in stocks, which pushed the Nasdaq Composite (COMP:
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Last: 1,587.00+58.05+3.80%
5:15pm 03/26/2009
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COMP 1,587.00, +58.05, +3.8%) back into positive territory for the year. See Market Snapshot.
"We already had some strength, and after the 7-year auction came out on the good side, that helped the markets," said Peter Bookvar, equity strategist at Miller Tabak.
"The so-so results [in Wednesday's auctions] raised concerns about the ability of the United States to finance its ever-growing obligations," he said. "So, today's results gave people a sigh of relief."
Last week, the Federal Reserve, now unable to further lower its key interest rates below its target of 0% to 0.25%, said it would buy up to $300 billion of Treasury bonds in order to lower borrowing costs. The move fueled a rally in Treasurys, and sent yields near record lows. See bond dealers survey.
Nick Godt is a MarketWatch reporter based in New York.
