Tuesday, January 6, 2009

Bond Market - Bursted or Yet?

January 5, 2009, Monday, 3-month and 6-month T-bills were auctioned. Results are as follows:

3-month T-bill:
discount rate: 0.15%; bid/cover: 3.11; total amount: 26b
(last auction: discount rate: 0.05%; bid/cover: 2.44; total amount 26b)

6-month T-bill:
discount rate: 0.32%; bid/cover: 3.26; total amount: 27b
(last auction: discount rate: 0.25%; bid/cover: 2.51; total amount 27b)

Both rates are increased from the last auction. The rise of the discount rate of 3-month T-bill is even at 3 times than before. However, it is too early to mention about the dead of bond market. The key is about the bid/cover ratio. For both T-bills, the bid/cover ratios are above 3.00. It is a signal of strong demand on the auctioned bills.

If we look for the discount rates of the same set of T-bills with the closest bid/cover ratio, they will be 0.15% (3 months, on November 17, 2008, bid/cover: 3.14) and 1.4% (6 months, on October 27, 2008, bid/cover: 3.28 ). Either they are the same as the current bid, like the 3-month bill, or they are 115 pts higher than the current bid, like the 6-month bill. Market has not completely walked away from the bond yet; rather they are looking for a "reasonable" bid. From the bid/cover ratio, currently the short-term T-bill ratio will settle around 0.05-0.15% (3-month) and 0.32-0.49% (6-month), according to the closest bid/cover ratio in December 2008 (3-month; 0.05%; on December 8, 2008 and 6-month; 0.43%; on December 8, 2008).

Taking a more macroscopic point of view, desipte the anticipation of the depreciation of USD ratio and potential inflation (which is quite impossible in short-term), T-bill so far is still one of the "safest" class of assets for central banks and even large commercial banks portfolio provided that USA government can still operate and honor its contracts. Europe can be a competitor yet it is subjected to a equivalent, if not bigger, scale of recession. EURO's strength is also subjected to further questions had EURO zone property market and domestic consumptions continued to drop. The lack of military strength of Europe will not help EURO stand stiff against USD either. Other Asian currencies, including RMB and JPY, have already heavily invested on Treasuries market. Their discontinuity on purchasing Treasuries will damage no-one but themselves. Their so-called threat of buying other asset in replace of US Treasuries can only be interpreted as "complaints". Once USA re-adjusted the basic discount rate for later rounds of auctions, in the short-run China and Japan will not deviate from US Treasuries in order to protect their own existing asset and currency base, particularly under a highly fluctuated market.

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