Treasury Issues

There is no doubt that Treasury has some severe issues to deal with but these comments pertain to the actual paper. The last 2 supply sets resulted in good - good - good...bad- bad - bad results. Yesterday, amid the crisis hype, the 3 year came 1.5bp through the market. Capital markets are showing less stress this morning so the auction results should be interesting.

Since the debt ceiling was hit on May 16 and funding is being swapped with Federal retirement account shenanigans, the actual trouble date for Treasury is July 22 not the quoted August 3. The irony of the situation is as everyone debates "too much debt" the market is functioning as if there is too little. The T-Bill auction (at 2bp) was 4.9x oversubscribed. General Collateral as floated between -.02 and +.02 since late May.

We continue to believe that even the flight to quality story is weak. Any movement toward the more natural 12bp funding level and major position reshuffling ensues. The QE hype from the minutes was over stated. The actual debate was well countered by those that saw too much accommodation. Noticeably missing was any discussion of cutting the IOER rate. This simple, somewhat technical given the above, adjustment should be on the table.

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