The 10 yr bond has given some of us some anxiety over the past few days/weeks. Admittedly a rally from low 2% to high 3% is big (at least on a change basis…debatable on a level basis, although it would be a high real yield if we descend into a deflation depression what that’s not the baseline expectation at this point). All this being said what is causing the large fall in U.S. debt (remember a rising yield mean a falling bond price)? The answer as far as I can tell is awkward auctions. Where the price for new issuance is not coming in where the market expects them and it is shaking the confidence of debt buyers. Some people have speculated that China has taken a breather from buying treasury debt to show that they don’t have to do so. If that is the case, which doesn’t show up on a level basis in the custodial holdings (it could be done via a shift in maturity structure purchasing), and they want to keep their currency policy they have to buy other $ assets. If they are unhappy with the risk of US treasury bonds its hard to imagine they are happier with – say – equities or corporate bonds. That being said that could have rock the asset class or debt distribution boat for a few auctions to send a message.
What would that message be? In part ‘we want assurance about better fiscal policy/we want to be paid back’ but it is also about the type of debt that is being offered. The U.S. treasury department has been issuing a lot more 3-5 yr issues instead of bills while bills have appeal to these hyper-risk adverse policy investors. They are not being given the flavor that they want, thus the boat is rocked. From the U.S. perspective you can push the 3/5 year debt and risk bumps but you have less roll over risk over the next few years. I think this is a smart strategy (I’m assuming this is being done explicitly).
This reality is illustrated in the following chart which show three snap shots of the Federal Debt Distribution (the portion that I’m talking about is the difference between Feb-09 and May-09…2000 is there for other reason). 
