The treasury market involves new issuances and secondary market trades of US Treasurys. To the alarm of many (including us) the vast majority of new treasury issues (around 90%) are used to refinance old obligations, rather than create “new money” for government use.

Of a recent near-failed issue for a 30-year bond, the “tail,” expessing the difference between the “When-Issued” expectation (before bids were submitted) and the actual pricing of the issue exceeded 5%. This is a massive warning sign that treasury rollovers may be losing confidence of traders. What is behind this near-fail issue?

The biggest problem in the US is increasing government expenditures — i.e., expanding fisal policy. As Congress spends more and more money for various government plans (medicare, social security, social programs, defense spending, wars in foreign countries, etc.) the Treasury must issue new bills and bonds, along the yield curve, to pay for it all.  But we seem to have hit an upper limit on the Treasury issuances that can be absorbed by the economy without something “breaking.”

For these reasons, Treasury policy and new issuances has become important than ever before, and must be tracked closely.