As yields on Greek debt soared to a record 117% for one-year notes, the US Treasury announced a new auction of 3-year notes with an entirely different response.

While investors were busy watching Europe for any sign of life, a round of 3-year US Treasury debt escaped auction at a record low rate. According to the Treasury, the notes sold with a yield of .334% per year, meaning investors will walk away with little more than $10 in 2014 for every $1,000 invested.

Outside of the horribly low yields is the reality that, even while the yields on the bonds fell to record lows, it wasn't demand for the new issues that pushed yields lower. In fact, fewer bonds were purchased in this auction by non-dealer buyers than any auction in weeks. Against a bid-to-cover ratio of 3.15--the bid-to-cover ratio is the ratio between bid volumes in dollars and bonds available for sale)--the US Treasury sold less than half of the new issues to investors other than primary dealers.

Who's Doing the Bidding?

Primary dealers are large banks hand selected for the purposes of making a US Treasury debt sale a generally normal happening. When liquidity does not flow in from bidders who are or are not represented by a primary dealer, the dealers are obligated to snap up the remainder. Recently, being a primary dealer has become a bit of a chore as investors pass up on US Treasury auctions to focus on European issues, which are significantly more active with default fears surging.

At any rate, the disconnect between the rate at which the bonds were issued and the amount of demand for US Treasury issues seems to indicate that investors are not only aware that low yields are their only option, but that doesn't mean investors want US Treasuries.

LIBOR Spreads

The cost of borrowing for the US Treasury, when compared to the cost of bank financing, is incredibly low. The latest issue of US Treasury debt came with a yield slightly less than that of 3-month LIBOR yields for US dollars, meaning that banks are buying the US Treasury's issues against a much higher annualized return to lend to other banks.

Such a level of fear among bankers is not good for the future of the financial system, and it casts a shadow on the sunshine and rainbows future painted in the early months of 2011. Remember, it was just weeks ago that new rumors in the European Union sent more money to the European Central Bank than at any point in history. Now it appears that the fears about a global economic meltdown have hit the US shores--there is simply no other reason why investors would accept lower, longer-term yields if a meltdown wasn't in the cards.

As any banker should know, a .334% rate for 3 months is much better than the same rate for 3 years. Apparently the rule of thumb relationship between time and money is no longer in play.