Every Monday, the Treasury holds an auction for 90 dayT-Bills. There are two ways to purchase the bills; Competitive and Non Competitive (a non competitive bidder accepts the average price of the Competitive bids selected).
Here is pretty much how it works. The Treasury figures out how much they want to sell that day. They add up the Noncompetitive bids and subtract them from the total desired. Then they examine the Competitive bids. They accept the lowest interest rates offered by the Competitive bids until they reach the desired total.
Lets look at the auction results for 13 week T-bill for last Monday’s auction.
The thing to really notice is the total applications. In this case, over 42 billion was offered and only 17 billion was accepted. There is a lot of money out there looking for a home. There is also “Accepted foreign noncompetitive.” The 26 week had a healthy chunk of foreign interest 300 million vs. the 75 million for the 13 week. As long as total bids is larger than the amount needed, the Treasury is somewhat secure. If some of the Competitive bid players were to leave the market, the interest rates accepted would probably shift higher.
The quality of Treasury’s is not in question. But, examine the plethora of housing loans that seem to be written at about 6.25% interest, something is quite disturbing. The added risk factor is not reflected in the rates being charged. Investors are willing to accept higher risk for less premium. It looks as if the inexperience Mutual Fund money manager has gotten “experience.” The only problem, there hasn’t been a real melt down to show these “seasoned” investors what the real world can be like.
Think about it from a money manager’s view, they have been doing this for 15 years. So they ought to know what they are doing, don’t you think?
What it really boils down to, is there is no perceived risk in the market. Here is a historical graph of Fannie Mae rates along side of the CMT (monthly average of the Constant Maturity Treasury’s Index)
From the spread between the two we can deduce two things. One, the 13 week T Bill interest rate is determined by competitive bidding. And two, something is out of whack with the home loan interest rate.
Does it really make sense that a 13 week T-Bill and a 30 year mortgage only have one percent of risk between them.
Didn't Greenspan call this a Conundrum?
What is plain, is that the dynamics that got us to this point in time, are not going to stay in place forever, something is going to snap.