Short Magic, Long Gravity

by Mr Juggles

From Bloomberg, Treasuries Fall on Concern Record Sales Will Overwhelm Demand:

Treasuries fell for a fourth day, pushing the difference in yields between two- and 10-year debt to a record amid concern record supply will overwhelm investor demand as the economy begins to show signs of stability.

“We are in a bit of a freefall,” said Kevin Giddis, head of fixed-income sales, trading and research at the brokerage Morgan Keegan Inc. in Memphis, Tennessee.

The decline pushed 10-year note yields to a record 2.75 percentage points more than two-year securities, surpassing the record of 2.74 percentage points set in August 2003.

The yield on the 10-year note rose 18 basis points, or 0.18 percentage point, to 3.732 percent at 4:19 p.m. in New York, according to data compiled by BGCantor Market Data. That’s the highest since Nov. 17.

Apparently, there is a finite limit to increasing the supply of something such that it will begin to become less dear. Some refer to this reversionary force as part of the unproven theory “supply and demand” wherein the basic concept is that if there is demand X for some thing T-Bill and there is supply Y then there will be price Z. If Y is decreased, then a new equilibrium price will be attained that will be higher than Z. If Y is increased, then a new equilibrium price will be attained that is lower than Z. Except for Giffen goods, never forget about Giffen goods.

Some people, and most politicians, insist that such forces and theories are not only unproven but are unlikely to exist. If they were to allow that “supply and demand” may exist, they would stress that it’s important that we do what we can to obviate our need for such burdensome natural laws. Is that not the mission statement of Government? To not only protect people from nature, from other people and more and more from themselves, but also eventually from gravity and its ilk? Progress.

Recommendation: We’re not sure but we don’t think the lowest Treasury yields in American history are sustainable forever, and that pushing them down now comes at a cost later. Long gravity, short magic.

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