November Bond Sale Rates

The November rate took a dramatic rise from historical rates which have hovered in the 6-6.5% range for over two years. The amount of the increase is extraordinary, but given current market conditions, an increase in rates is not unexpected. What factors caused such a dramatic jump?

First, the U.S. Government is issuing substantial amounts of U.S. Treasuries Bills and Notes to cover the costs of the massive financial sector bailout, and with excess supply, prices rise to entice investors. The ten year treasury rose almost 0.4% from our October sale.

Second, with increased amount of risk free Treasury Bills and Notes available at more attractive rates, investors are requiring larger premiums to buy other products. As an example, shorter term corporate debt issuances for blue chip Fortune 500 companies have been at rates higher than the November 504 rate. This indicates that the 504 rate is a competitive 20 year, fixed rate. Our rate rose approximately 0.75% due to the increased premium demanded by investors.

Lastly, we are approaching the end of the year when investors are looking at closing out their 2008 investments reducing the amount of capital being brought to the market at a time when the supply of investment opportunities is high. Again, this results in higher spreads for those investors still in the market.

Will 504 rates decline after the first of the year? It’s certainly not anything we are qualified to speculate about. What we do know is that the U.S. Government is expected to continue to issue debt to fund its obligations over the next twelve months – in fact, that level is expected to be approximately $1 trillion. Our bond strategist is hopeful that the bailout package is working and that markets may see a period of relative calm, but he has given no indication that rates will decline after the first of the year.