Government Debt Prices Decrease due to Stocks Surge

April 11, 2009 by economist
Filed under: Bonds Market

Government debt prices dropped Thursday as stocks rallied on Wells Fargo’s first-quarter profit forecast.

The San Francisco-based bank said Thursday that it expects to post a profit of approximately $3 billion for the most recent quarter, surpassing estimates. The news sent the Dow Jones industrial average jumping as much as 200 points as investors hoped that the banking sector might be headed for recovery.

When investors feel more confident about the economy, investors move out of the security of Treasurys. Besides the optimism from Wells Fargo, the Labor Department said the number of people who filed for initial claims in the most recent week fell by 20,000.

“The employment numbers have taken on what amounts to one-sided relevancy of late: nobody seems surprised any more by weak employment results,” wrote Kevin Giddis, head of fixed income sales at Morgan Keegan in a research note. “But if claims happen to come in lower than expected, the market can still be counted on to sell off Treasurys on the basis of inflationary fears.”

Meanwhile, the market has deal with a torrent of supply. The government has been selling tremendous volumes of debt to fund its numerous stimulus programs.

So far this week, Treasury has sold $152 billion in issues ranging from 4 weeks to 10 years. On Thursday, the government is scheduled to auction $18 billion in 9- year, 10-month notes.

“On the heels of a good ($35 billion) 3-year auction yesterday, the investment community will turn its eyes on the results of the 10-year auction scheduled today,” wrote Giddis. “Don’t get too spooked out by a sloppier auction that usual, though. My guess is that today’s early close might make for less-than-optimal conditions.”

The Treasury market closes early Thursday and is closed Friday in observance of Good Friday.

On Wednesday, the government bought $2.97 billion worth of Treasurys as part of its $300 billion buyback plan, out of more than $31 billion worth of debt submitted for auction.

The government is selling its debt at a much more rapid rate than it is buying it back, however. The imbalance has investors concerned about who will continue to purchase such volumes of supply.

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