Committee for a Responsible Federal Budget

MARKETWATCH: July 26-30

Jul 30, 2010 | Economics

The week saw ups and downs of interest in Treasury debt instruments on the margin.  Foreign interest backed off a little as perceptions of risk: return trade-offs shifted, like a yo-yo.  The week ended with Treasury yields near record or recent lows, a positive sign of strong demand. Debt remains cheap – for now.

As traders wrapped up for the month and the weekend, they turned their focus back to Treasury debt instruments. As a result, demand for the benchmark 10-year note rose as of Friday morning. Safe haven effects appeared to have kicked in again, as higher demand reflected weaker than expected US second quarter GDP news (+2.4%, a slowdown from the first quarter). Investor concerns over a weakening economy were also raised by recent statements about economic weakness by several regional Fed Bank Presidents. (Demand was also bolstered by the need for fund managers to buy Treasuries to match adjustments in their indexes for end of the month internal housekeeping.) As a result, the yield on the 10-year note was below 3% once again, close to one of the lowest point since the recession began. Similar trends can be seen for debt at other maturities.

But markets can shift quickly – at least at the margin. In contrast to today’s interest, yesterday’s Treasury auctions (the end of this week’s $104 billion government note auction) were considered disappointing. Reports blamed tepid interest from foreign central banks and investors, possibly due to low interest rates, which did not provide sufficient return. Foreign interest is not considered to have shifted in a fundamental way.