While the May auction results for the current debenture were interesting in continuing a slightly declining rate trend, the real action was in the decrease in the spread to Treasuries, which dipped to a near record low of 39 bps.

Consider this in light of our comments from last month’s discussion of rates, and this month’s commentary from the DCFC letter. Last month, we discussed the likelihood of a period of stable and low Treasury rates in light of the declining supply of Treasury debt coming to market due to the substantial declines in federal budget deficits. This month, DCFC points out that downward pressure is also being exerted from the demand side as pension funds are buying bonds as a function of regulatory and liability matching issues. The implication of the declining spread may be that Debentures are being viewed favorably as a surrogate for Treasury paper and that DCFC is successfully broadening the market.

In combination these events could likely continue to offset the decline in Fed bond purchases under quantitative easing. Add a touch of St. Vladimir, the patron saint of global uncertainty, a smidgen of absence of significant inflationary pressures; and through the alchemy that is the Bond Market, you have lower long term interest rates.