Treasury Auction "Quenches" Thirst: Calms Market

What a difference a week makes. The U.S. Treasury auctioned a record amount of short-term bills this week which is calming the market. "It quenches the thirst for risk-free paper," says CNBC's Rick Santelli. Today's combined record $43 billion auction in three and six-month bills saw the strongest demand since June and drew much higher yields than we saw last week.

The six-month saw a yield of 4.59% while the three-month drew a yield of 4.60%. Last week, when the t-bill market saw historic demand, the three-month was yielding 2.85%. The 10-year was yielding 4.60% this afternoon.

"There was good demand, better than last week, given the record supply" said Santelli.

But Is This Really Good News?
"You have t-bill rates moving higher, but you have the two-year note moving lower and the yield curve is steepening, and steepening lately means there's concerns," says Santelli. "The market's getting back on track to trade some of the not so great conditions in a more normal way. Liquidity is more on track. I don't think the world is a less dangerous place. It's just there's more liquidity to let it trade more properly."

Miller Tabak's Tony Crescenzi says the auction is the biggest since 1990. In a note, he says "the results look good at face value and even stronger when adjusted for the large auction sizes. Some would rather see weak results, however, with money flowing to risky assets instead of T-bills. Hence, these results are not necessarily good news."

Tomorrow, $30 billion in one-month bills are set to be auctioned. Wednesday's auction is for $20 billion in 17-day cash management bills, and $18 billion in two-year notes. On Thursday, $13 billion in five-year notes will be auctioned. Total Treasury issuance is $124 billion this week.

Everyone Is Blaming Subprime
John Kilduff, senior vice president at MF Global, points out new comments from OPEC today, blaming the subprime mortgage muddle with clouding its economic forecast. OPEC's Secretary General Abdullah al-Bardi also said that the market is very well supplied and the picture would get more clear in December.

"They're clearly signaling that they're not going to do anything (when they meet Sept. 11). They're going to keep the lid on production. They think they've done a pretty good job for themselves. They don't see the global economy impaired by $70 oil. They have a convenient scape goat at the moment to allow them to roll things out until December," said Kilduff, who is a CNBC contributor.

Oil is up about $0.29 at $71.38 while natural gas today continues to fall. Natural gas was down about $0.191 to $5.333.

"It's cooling demand. That heat wave we had going for about a week broke up. There's no significant storms on the horizon. There's no significant heat on the horizon," said Kilduff of the decline in gas prices. He also said it is pulling down the price of heating oil. "Hopefully, it'll be good for consumers' heating bills."

Questions? Comments?