A quick glance at this week's government bond auctions reminds me of that old story Woody Allen used to tell about overhearing two women in a Manhattan restaurant: one complains that "the food here is just terrible," to which her friends agrees, adding, "yes, and such small portions."
Small portions aren’t exactly on offer from the US Treasury, which will flood the market with a record $67 billion in supply this week (on its way to perhaps $2 trillion in debt sales for the year) but investors can’t seem to get enough of a bad thing.
I "grew up" professionally in the fixed-income markets, so I’m both naturally biased - and some would say naturally bearish. But even I have to admit that no one really wants to buy bonds (not in January, anyway, when they lost you three percent).
You just sort of have to.
That compulsion is evident in the demand we're seeing for this weeks Treasury sales -- especially from non-US buyers -- even as yields hover near decade lows.
Indirect bidders -- which include the foreign central banks that everyone tells me are going to stop funding the US current-account deficit -- bought 45 percent of this week's three-year auction, the biggest chunk in more than four years.
OK, three-year bonds are scarce, so there's a diversification play that we should probably back out, but they also took down nearly 38 percent of the record $21 billion 10-Year auction. That was the most in at least a year.
Remember that this comes as commentators around the world point to the massive unfunded liabilities of the US government, the near-zero interest policy of the Fed, the huge public-indebtedness of the American consumer and the massive stimulus and rescue packages of the Obama administration.
Now, contrast this paradox with the second stumbling attempt to move bunds in the primary market this week by the Germany: the Bundesbank had to retain about 30 percent of the 6 billion euro 10-Year issue, this after holding onto 1.94 billion euros of its last 10-Year auction in early January.
And don’t forget that German bunds offer an extra 40 basis points in yield, carry a triple-A credit rating and trade in a market where target interest rates are currently 2 percent -- but expected to fall quickly over the next two or three months. They're also sold by world’s largest exporter and serviced by an economy that has a savings rate of around 10 percent.
So why the struggle to shift them?
Well, let me turn that around, and get us back to Woody Allen.
At the end of the day, money managers don't get paid to invest in Treasurys. But you can’t deny that capital preservation, an inflation-adjusted yield of 2.87 percent (a two-year high), pure liquidity and a the promise of quantitative easing from the Fed make the prospect a lot more compelling than dipping your toe in either the crowded corporate bond trade, still-suffering commodities or the fragile equity market.
And I’ve not even mentioned the elephant in the bond trading room: China. They own nearly $700 billion of the stuff, after adding more than $100 billion last year. Talk of diversification towards the euro zone seems unlikely as ratings get clipped in Spain, Ireland, Greece and Portugal.
In fact, China was instead in the field this week, in the form of adviser Yu Yongding, seeking assurances that its holdings wouldn't be hurt by the new administration's spending plans. Let's face it: when you’re sitting on $681 billion worth of bonds, it makes a lot more sense to keep them (and preserve their value) than it does to sell them (and erode the value of what’s left). The bond market is big, but it might take a while to move six hundred billion.
In “Annie Hall”, Allen tells the story of a man who tells his psychiatrist that his brother “thinks he's a chicken.” The doctor says: “Well, why don't you turn him in?" The man replies: "I would, but I need the eggs”.
Like it or not, you need the Treasurys, too.