[John Defterios, Cnn Anchor:] This could turn out to be another volatile day for the bond market with today's auction of 30-year notes.
[Deborah Marchini, Cnn Anchor:] Christine Romans join us now to explain something of the wise and wherefores Christine.
[Christine Romans, Cnn Correspondent:] It has been very bewildering for those people who've been watching and dealing in the bond market lately. And we have the quarterly refunding this week, that is a supply situation: The five-year note sale was hum-drum; the 10-year note sale was called a "disaster, anemic." That was yesterday, and the long bond suffered a bit on that. And we get the 30-year sale today, and there's two schools of thought. Some people think that because the first two legs of this auction did not go so hot, it could be a little bit sloppy today. We could see some volatility and maybe a downside move in the bonds. Because of that, others say that maybe the long-term players, the U.S. pension funds, stayed out of the first two legs of this refunding, and they'll be bidding for the long bonds. So we'll have to wait and see. Early this afternoon we'll get the answers to that. But, as I said, it's been very bewildering for the bond market, and there are lots of things going on here. You know, we heard last week about major steps to pay down pay down government debt, and then a lot of people assumed that the long end of the bond was where the long end of the yield curve, rather, was where this was going to happen, that the government would be buying back its 30-year bonds and would be and as they did say, would be issuing fewer 30-year bonds. And then Larry Summers comes out yesterday, he's the Treasury secretary, and he says that they're actually going to use the entire yield curve to hold down their borrowing costs; that really threw a wrench into people's expectations there. Also, some people are believing that a slowdown is imminent; that was one reason why the market was able to really the yields come off significantly last week. But at the same time, a lot of people saying the Fed is going to raise interest rates in March. So lots of different cross-currents going around in the bond market, and it's making for very, very volatile trade. I want to look real quickly at a 30-year yield chart and the 10- year note chart. You can see how they behaved over the past year. You can see recently things have inverted; it's called a "yield-curve inversion." It gets very technical and hard to explain, but you can see there on that chart what that means. Yesterday, with a long bond at 6.31 percent, but the 10-year note at 6.65. So you're getting more yield, more money, you know, a better return at the short end of the market, which is counter-intuitive and sometimes can indicate that an economic slowdown is in the works. So lots of really crazy stuff going on there.
[Marchini:] Bottom line here is last week and again yesterday, a lot of people lost money in the bond market because of something they though the Treasury did. What's the fallout from this?
[Romans:] I don't know. You know, that's a very good question. It has been so hectic lately. I think you can really assume that a lot of people are taking to the sidelines and are going to sit back and wait and see: Is the 10-year going to become the benchmark? A lot of people are saying it is. The 30-year is a scarce commodity; it's going to volatile; it's going to be illiquid. But that said, now we have Larry Summers saying that they're going to be buying back securities all along the yield curve, so what does that mean for the rest of the...
[Defterios:] Well, it's interesting, prior to being number one at Treasury, he was not as cautious; remember his comments about the dollar kind of shaking things up. But he's learned to be very cautious, and that really raises into question here: What his motivations truly were?
[Romans:] It really does. And it's interesting, one of the economists who I follow, he said something he called it "Larry's misstep"; it's a learning experience, that Larry Summers should never have said that and that Robert Rubin wouldn't. He said, tough love. So it's interesting that, you know, this is Larry Summers' sort of first year on the job, and here in the bond market, he you know, everyone says he moved it a point yesterday.
[Defterios:] And costly love, we should say, right? Not tough love, costly love.
[Romans:] Yes, exactly.
[Marchini:] Suffice it to say a lot of bond traders are not too happy with him yet.
[Defterios:] Yes.
[Marchini:] All right, Christine, thanks a lot.
[Defterios:] Thanks.