Stong 10-Year Treasury Auction Quells Rate Fears - For Now

Today's strong auction of 10-year Treasury Notes quelled fears that rates may push higher in the future. For now, the 10-year seems contained below 4%. The strong bid to cover ratio shows that Uncle Sam has no problem borrowing money at cheap rates.

The high bid in the auction was 3.90%, below the 4% yield that Treasuries touched just a couple of days ago. Perhaps more significantly, the bid to cover ratio was 3.72. That means for every dollar of Treasuries available, there were $3.72 looking to invest. That's a strong number and it shows the insatiable demand for US debt. This has a couple of implications for consumers:

• Mortgage rates which surged to 5.2% over the past week will likely go no higher in the short term and will come down to the 5% range over the next week or two.
• The fear that massive US borrowing will drive interest rates sky high has not yet materialized. The world seems more than eager to gobble up US debt at relatively low rates.
• Markets do not believe there will be big surged in inflation in the future. If they did, 10-year Treasuries would be auctioning at much higher yields.
• Financial markets are now beginning to function in normal ways - both the stock market and bond market is rising even as the Fed pulls its support out of the system.
• Deposit rates (savings, cd rates, etc.) can stay low for awhile longer. If Treasuries surged, it's hard to see how the Fed could have allowed the Fed Funds Rate to stay at 0-.25%. Stable longer term rates allow for stable short-term rates.

Right now, the Fed has the best of all conditions: an improving economy, low rates, 0 inflation, and low borrowing costs - even as it exits many support programs. We'll see if it can continue to walk this tightrope.