A bad week for the economy and financial system

A bad week for the economy and financial system means
investors are in a more risk-averse frame of mind to deal with next week's
flood of U.S. government bond issuance.

That's one side of the conundrum facing the market and the Treasury
Department these days. Any sign that the economy is improving would make it
harder for Treasury to carry out its mammoth financing plan.

"On a certain level for the Treasury auctions, the more people are worried
about the world, the more people want flight-to-quality assets, the better for
the Treasury auction," said Jonathan Lewis, chairman of the investment
committee at Samson Capital Advisors.

The Treasury Department plans to sell some $148 billion next week, comprising
$85 billion of short-term bills, $34 billion in three-year notes, $18 billion
in 10-year notes and $11 billion in 30-year bonds.

The conundrum is likely to remain over coming weeks and months given the huge
amount of Treasurys that must be sold to finance the government's rescue
packages and the spending program. There are going to be nagging concerns that
issuance may overwhelm the market.

"There is a tipping point at which there's not enough worry in the world to
absorb all the Treasurys," Lewis said.

In a related twist, the market also is debating the likelihood of the Fed
stepping in to buy up U.S. Treasurys after Thursday's move by the Bank of
England to start printing money to buy U.K. government bonds, and U.S.
Treasurys rallied in response. So far, money printed by the Fed has been used
to target specific corners of the credit market.

If, however, the interest rates on longer-term government bonds moved too
high for the Fed's liking, perhaps in response to the flood of supply, the
authority has suggested it might be tempted to step into the market. Yet Fed
Chairman Ben Bernanke has made it clear that for now, he doesn't believe this
is an effective policy.

"Given the statements of Chairman Bernanke in (the) last hearing regarding
the ineffectiveness of Treasury purchases, we would question the reasoning
behind the rally," said Barclays Capital, in a research report.

Meanwhile, poor-economic data no longer seems to have a direct impact on a
bond market, which is prepared for a deep and prolonged recession. Yet
continued bad numbers mean investors will have to push back their eventual date
for a recovery.

Next week will bring key data on the U.S. consumer, who has generated an
ardent debate among economists and investors. While there are those that are
sticking with "don't bet against the U.S. consumer," others feel that rising
unemployment and large debt burdens mean consumers are going to be underwater
for some time.

February retail sales data Thursday, followed by a preliminary consumer
sentiment survey Friday, will provide more fuel for that fire.

Bad news may continue to weigh on investors throughout the coming week as
they await, perhaps again in vain, for more clarity on the future of three
troubled giants, Citigroup Inc. (C), General Motors Corp. (GM) and General
Electric Co. (GE).

After a spate of appearances before Congress this week, most government
officials get a breather next week and attention will begin to turn to the next
meeting of the Federal Open Markets Committee on March 17. Bernanke attends a
Council on Foreign Relations event in Washington on Tuesday for a discussion on
financial reform to address systemic risk.