Geithner sells bonds at lowest yield

Less than a week after deflecting calls for his resignation, Timothy Geithner sold bonds on behalf of US taxpayers at the lowest yields on record in a show of confidence in the Treasury Secretary’s policies.

Even as the nation’s debt increased by $1.15 trillion this year to $6.95 trillion in October, the government’s interest expense under Geithner dropped 15 per cent, the biggest decrease since before 1989, according to data compiled by Bloomberg. The Treasury auctioned $44 billion of two-year notes November 23 at a yield of 0.802 per cent, the lowest on record.

Rising demand shows investors believe Geithner, 48, is striking a balance between policies to promote growth and the borrowing needed to finance a $1 trillion deficit. The economy will likely expand 2.6 per cent in 2010, after the government and Federal Reserve lent, spent or committed almost $12 trillion to keep financial markets from collapsing, according to the median estimate of 63 analysts surveyed by Bloomberg. That’s in line with average growth of 2.63 per cent from 2002 through 2007.

“There have been many criticisms of him, but he’s done a good job,” said Tsutomu Komiya, who invests in Treasuries for Tokyo-based Daiwa Asset Management, which oversees $77 billion. “He brought stability to the financial markets. We can’t help but invest in Treasuries because of their safety and liquidity.”

The yield on the benchmark 3.375 per cent note due November 2019 fell 16 basis points, or 0.16 percentage point, last week to 3.21 per cent, compared with the average of 7.31 per cent since 1969 for bonds due in 10 years. The yield was 3.23 percent as of 11:31 am in Tokyo. Interest rates are low even though the deficit exceeds $1 trillion for the first time.

When the gap peaked in the first half of the decade at $412.8 billion in 2004 under Treasury Secretary John Snow, yields on 10-year notes, which serve as a benchmark for everything from mortgage rates to corporate bonds, averaged 4.26 per cent. When it topped out in the previous decade at $290.4 billion in 1992 under Lloyd Bentsen, yields averaged 7 per cent.

Geithner inherited an economy mired in the first global recession since World War II and financial markets frozen from the collapse of subprime mortgages that began in 2007 under his predecessor, Henry Paulson. He’s overseen 71 bond auctions this year while at the same time reducing interest expense by $67.8 billion to $383.4 billion from $451.2 billion.

“We must lay a foundation for a more balanced and sustainable pattern of future growth, both within and across countries,” Geithner said on September 5 in a statement at the conclusion of a meeting of Group of 20 finance ministers and central bankers in London.