US Refunding

It is difficult to envision today's $25 bln 10-year Treasury note sale to be as well received as yesterday's 3-year offering. Indirect bidders, which includes but is not limited to foreign central banks took down 68.5% compared with an average of 45.3% over the past ten auctions. The bid-cover, which is a metric of demand, was 3.33. Demand for this record sized issue was the strongest since 1993. The average for the past ten auctions was 2.63. Even if the reception at today's 10-year auction is not as spectacular, the point is that demand for US Treasuries, even at these low yields, remains strong. It also illustrates why the foreign exchange market is not the center of concern for most policy makers. Clearly the G20 and IMF are not so concerned and if anything see it as part of an ongoing adjustment. For US policy makers the weak dollar comes at a relatively low price, at least presently. Typically currency depreciation costs are seen in terms of inflation and a risk premium. Although inflation expectations are dynamic, it does not seem as if the dollar's weakness is spurring much in the way of price pressures. US rates remain low and foreign demand for US Treasuries remains robust (buying a greater proportion of this year's significantly larger offerings compared to a year ago). Moreover, over the past month as the euro flirts with the $1.50 level and the dollar index makes new lows for the year, the US S&P 500 is the best performing G7 equity market and US 10-year Treasuries have outpeformed the UK, Germany and Japan.