With QE II now certain to end in June, the question is what buyer will enter the market place to replace the Federal Reserve?
Pimco’s Mohamed El-Erian and Bill Gross can’t identify a buyer for treasuries at their current prices, and have sold off their positions as a result.
Societe Generale Fidelio Tata argues this summer’s flood of supply sans an obvious buyer is likely to have two distinct impacts on the treasury market.
First, the Treasury auction process may become more volatile due to the reduced liquidity provided by primary dealers. More volatile Treasury yields, at the margin, may discourage investors from buying Treasuries or make them demand an additional risk premium that drives up Treasury yields. Second, primary dealers will likely submit smaller amounts during the Dutch auction process, causing the market-clearing auction price to set at a higher Treasury yield.
So yields are going to go higher when this flood of treasuries hits the market in July.
Photo: Societe Generale