U.S. Treasury debt prices eased on Wednesday as spotty auction results confirmed fears about the market’s ability to absorb a growing need for new issuance, offsetting any safety bid from careening stocks. [1]
The last few weeks of the Bush lame-duck term is obviously cloaked in a financial fog of battle, so there’s got to be something heavy going down, but what it is I don’t know. One safe assumption is that the powers-that-be are trying to steer retail investors into decisions that will benefit their rich buddies — not retail investors. What about America’s risk-free sovereign Treasury Debt? Barron’s current cover is screaming Get Out Now! [2] Bary’s analysis is so transparently bogus I’m starting to feel like Vizzini confronting the Man in Black in The Princess Bride. Is he herding folks into crap like Muni’s and Junk because treasuries are too crowded for his friends? Why complete silence on Agency Debt, a logical option to consider? PIMCO (who he cites approvingly) has agencies up the ying-yang, but if Bill or Mohamed have breathed a word about the stuff over the last month I’ve missed it. It gives me the creeps.
Minyanville is casting a jaudiced eye [3] at Barron’s over this. Meanwhile the usual suspects like Goldseek [4] and MarketOracle,[5] along with more sober sources like Reuters (see above),[1] Bloomberg,[6] and FT Alphaville [7] are seeing signs of real trouble for treasuries investors. But then an LAT blogger looks at exactly the same info and concludes things couldn’t be better for treasuries.[8]
Nobody expects to see a hard sovereign default against the world’s reserve currency, or that mob of outraged BIS economists pulling down Hamilton’s statue in front of the Treasury Dept anytime soon. The analysts herding anyone who will listen away from T-bills are saying "inflation now," while the contrary voices are saying "inflation, but not yet." Tomorrow’s NY Fed H.4.1 release may show if foreign central banks are continuing to moderate their net purchases of treasuries. That chart has bubble written all over it, and the big-time reduction in the buy-size last week might actually herald a top. Last week was the 17th straight week of net buys, but the blizzard of media coverage of treasury bill sales has set us up for trend-busters tomorrow. With the Fed and Treasury loaded with every conceivable and inconceivable weapon and tool to keep economics and finance flying, it’s hard to see things spinning out of control. But if T-bill yields start rising in spite of ZIRP-Americano its hard to see how necessary policy-driven numbers like 30-year conforming mortgage rates can be kept down.
Like I said at the beginning, I haven’t a clue what’s happening with this story.
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Notes and References
[1]: "Borrowing binge exacerbates selling in U.S. bonds", by Pedro Nicolaci da Costa, Reuters, January 7, 2009.
[2]: "Get Out Now! The bubble in Treasuries looks ready to pop, sending prices on government debt sharply lower. But just about every other corner of the bond market beckons — and could provide competitive returns with stocks, even if the equity markets have a strong 2009. (includes Video)", by Andrew Bary, Barron’s Cover Story, January 5, 2009.
[3]: "Five Things You Need to Know: Get Out Now!", by Kevin Depew, Minyanville, January 5, 2009.
There’s nothing quite like an alarming magazine cover headline to set the market’s tone for the new year. Talk of a bubble in Treasuries has been making the rounds on Wall Street for a couple of months now, so nothing new there. Over the weekend, however, Barron’s gave the Treasury bubble cover story status, "Get Out Now!"
…Of course, the chief risk to the Treasury market, at least according to the Barron’s article, is "the potentially inflationary impact of both the Federal Reserve’s super-accommodative monetary policy, which has dropped short rates close to zero, and the enormous looming fiscal stimulus from the federal government."
That does sound like one disastrously inflationary cocktail. But below is why it may take much longer to make that drink than many think:
[4]: "Government Panic Could Herald Dollar Panic", by John Browne, GoldSeek, January 7, 2009.
Ever since, the U.S. dollar’s privileged ‘reserve’ status has been a principal factor in America’s continued prosperity. The dollar’s unassailable position has enabled successive American governments to disguise the vast depletion of America’s wealth and to successfully increase U.S. Treasury debt to where the published debt now accounts for some 100 percent of GDP. The total of U.S. Government debt, including IOU’s and unfunded programs, now stands at a staggering $50 trillion, or five times GDP! If the dollar were just another currency, this never would have been possible.
In today’s crisis however, the dollar is likely making its last star turn as the leading man in the global financial drama. Other stronger, less burdened currencies are waiting in the wings for the old gent to take his final bows.
[5]: "U.S. Treasury Bond Bubble Bursting?", Market Oracle, January 7, 2009 (excerpt of article published December 18, 2008).
[6]: "Treasuries to Post 1st Loss in 10 Years, Dealers Say", by Dakin Campbell, Bloomberg, January 5, 2009.
[7]: "Tide turning for treasuries?", by Tracy Alloway, FT Alphaville, January 5, 2009.
[8]: "Investors step up for Treasury debt, even as supply surges", by Tom Petruno, Los Angeles Times, January 7, 2009.
Despite the ballooning federal deficit staring Treasury bond investors in the face, the government today managed to sell a record $30 billion in three-year notes.
The notes sold at an annualized yield of just 1.2%
Investors put in a total of $66.3 billion in bids for the securities, which traders said was decent demand, if a bit weaker than expected.
"For a $30-billion issue, I think the market did pretty well handling it," said Brian Edmonds, head of interest rates at bond dealer Cantor Fitzgerald in New York.
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