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Posts Tagged ‘US Treasuries’

by Bud Conrad
October 17, 2011
Casey Research

Foreign central banks buy US Treasury and Agency debt through accounts at the Federal Reserve, where it is held in custody. Without these central banks buying our debt, the US federal government would have to find a new source of funds or the result could be higher interest rates. Looking at the data on a monthly basis (and then multiplied by 12 to give the annual rate), here is the dramatic picture of how foreign central-bank purchases of our debt have shifted, from buying $500 billion to selling off $1 trillion. At this rate of selling over several months, interest rates would go higher – if other things were equal. Of course, things are not equal because the Fed has been forcing rates lower with its massive QE2 and other programs. QE 2 was $600 billion over nine months, or an annualized rate of $800 billion per year. Since foreigners are selling off our government debt, Fed purchases of government debt are even more necessary.

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Here are the data on the amount of Treasuries purchased in the last quarter of the year at an annualized rate: Foreigners have decreased their holdings for the first time since 2007.

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Here’s another chart worth considering. This is a comparison to the ten-year Treasury, with the purchases of Treasuries inverted.

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In my latest article in The Casey Report on interest rates, I discuss the above chart and cover the broader issues driving interest rates.

What could be the cause of all this? The Senate passed a controversial bill that threatens to punish China for “currency manipulation” which will bring mandatory tariffs. China’s opposition to the Senate action could be the power behind the big shift in direction of these custody holdings. In an election year, government action against Chinese imports may be seen as supportive for US jobs, thus garnering votes. But unintended consequences of decreasing liquidity in the credit markets will put pressure on financial markets. The movement shown in these charts could be the result of China’s reaction to some of those anticipated policies. We can’t tell what country is doing the selling until two months have gone by and the TIC data are published. In some senses, it doesn’t matter which country is behind the shift. If rates begin to rise rapidly, even in the face of continued Fed manipulation, it could call into question confidence in the Fed’s ability to keep supporting the economy. The rate on the ten-year Treasuries jumped from 1.8% to 2.2% in the last week. Foreign selling of this magnitude is dangerous for the dollar, and it could be very bad for US interest rates.

[Whether this shift is temporary or a long-term reversal remains to be seen – but the end of the US dollar as the world’s reserve currency is all but certain. How can one prepare for such a life-changing move? Listen to the audio recordings of the recently held Casey Research/Sprott Summit, When Money Dies, to gain insights and actionable advice from experts including Adam Fergusson and Doug Casey on how you can not just survive what’s coming, but thrive. Order your set today.]

Additional Links and Reads

Banking Corporatism in 1912 (Ludwig von Mises Institute)

The Mises Institute dug up a great cartoon from 1912, representing what would happen to the US with the creation of a central bank. The picture says it all. That’s essentially what did happen.

Kinder Morgan to Buy El Paso for $21.1 Billion (Bloomberg)

In the biggest energy transaction of the year thus far, Kinder Morgan purchased El Paso Corp. to form the country’s largest national gas pipeline network. The natural gas market is an interesting beast. On the one hand, natural gas prices are dirt cheap. On the other, they can’t say low forever, but as Doug Casey says just because something is inevitable doesn’t mean that it’s imminent. There are some who have given up on investing in natural gas, while others are willing to put big bucks into it.

What I find interesting about the whole field is that involves so much hard science. Whether the general economy will go up or down is the realm of economics – not exactly a science. And of course, the economy will affect oil and gas prices, but natural gas requires making estimates of scientific facts. How much gas is left in the ground? What are the well decline rates? How damaging are fracking chemicals? While in economics we can argue back and forth without getting anywhere, these questions will have clear answers in the future. Someone will be right, and someone will be wrong.

Seven in Ten College Grads Are Employed Full Time for Employer (Gallup)

The second table of results from this poll, copied below, showed some particularly noteworthy findings which I’ve discussed before.  This table represents only workers and the unemployed who are searching for a job. At the top of the unemployment pile are workers aged 18 to 29 with 14% unemployment and 30% underemployment. That’s pretty crazy – only 56% are working full time. And of those 56%, how many do you think actually have a good, career-track job versus something like flipping burgers?

This relates to today’s intro. If one graduated college in 1998, one could get a job at Goldman Sachs. Graduate ten years later, and one will be lucky to find a position as an assistant accounting clerk with the exact same qualifications.

Read the entire article HERE.

by Tyler Durden
08/07/2011 21:38 -0400
ZeroHedge

While the impact on Treasurys as a result of the downgrade may be limited (after all the other side of the Atlantic is about as ugly as the US, so where could $8 trillion in marketable USTs practically go… at least for now), the same may not be said about the far smaller, $2.9 trillion municipal market, which is about to see a blanket downgrade tomorrow as S&P warned on Friday night, and of which Matt Fabian of Municipal Market Advisors earlier said that “There will be hundreds and hundreds of municipal downgrades, which will not do well to bolster investor confidence.” The scary bit: “Treasuries may be able to shake off a real impact from the downgrade. Munis I’m less sure about.” Indeed, with futures already trading, and most risk assets experiencing a brief knee jerk reaction on a global coordinated PPT response by the G-7, there is still little clear understanding of what will really happen to not only the traditional system but to shadow liabilities such as repos and money markets. And munis are just one part of all of this. So what will happen if tomorrow the muni market starts unravellling, as Whitney, among so many others, has predicted? For that we turn to JP Morgan’s Peter DeGroot for some quick observations.

From JP Morgan on munis:

• Market volatility should continue next week with S&P’s US downgrade following this week’s manic capital market performance
• Tax-exempt yield movements will likely remain unstable, as dictated by benchmark Treasury yields, despite low long-term new issue volume next week
• Instability in the US credit may further net outflows in the municipal space. Net issuance, however, remains supportive of liquidity
• After S&P’s announcement of the US downgrade, expect follow-through on municipals directly supported by the US credit, as well as those highly reliant on the federal government
• The Central Falls bankruptcy case will be important to follow because of its potential broad implications for local government credit
• While we have been warning for some time of the elevated strain on local government fiscal positions, Central Falls could potentially have ramifications that could support local credit quality by (i) bringing clarity to the priority of the GO credit, (ii) providing a model for state activism, and (iii) adding steam to the  momentum of some small cities using Chapter 9 to reduce fixed labor costs

What follows for munis as a result of the US rating action:

We anticipate some period of volatile/higher Treasury yields over the short horizon. We do not expect materially higher US borrowing costs as a result of the downgrade given that we do not expect sizable forced selling of Treasury bonds; rate movement of other sovereigns has been muted when faced with similar ratings actions; Treasuries quickly retraced their yield movements following the initial warning by the rating agencies; and the spot metrics for the US are arguably within the range for a AAA sovereign rating (see Treasuries).

 

We can expect S&P will downgrade all municipals backed by the US credit such as pre-refunded bonds and agency-backed municipal debt. Further, those credits with large fiscal transfer dependencies would also likely see in-kind downgrades. The rating implications are likely similar to those specified by Moody’s in their 7/13/2011 note.

 

Moody’s suggested moving approximately 7,000 muni bond ratings totaling $130bn, “directly linked” credits in lock-step with the US credit. Moody’s also reviewed “indirectly related” credits and placed five of the fifteen states they rate as Aaa on review for potential downgrade. These would also move in lock-step with the federal government rating.

 

Issuance limps along in August

 

The tax-exempt bond market will again take cues from the broader US fixed income markets, based on news of the US downgrade. Yield movements will likely remain unstable, despite low long-term new issue volume. Next week we expect supply of just $3bn based on late adds to the calendar.

 

Issuance in this range would be the lowest in four months (excluding the holidayshorted week of 7/5/11; Exhibit 3). This follows $4.9bn in primary market supply this week. The largest deal currently on next week’s docket is a $300mn Los Angeles Department of Water remarketing followed by $268mn Florida State Board of Education bonds. The expected light calendar should tick higher as refundings rush to take advantage of fight to quality yield levels if they hold after the S&P downgrade news.

 

The lack of a primary calendar and investor need for yield against the backdrop of low and dropping highgrade yields provide a fertile environment for  paring typically hard to trade structures and credits. Investors may be motivated to lock in gains on these names and structures while demand is robust to preserve total return performance in the event of an unexpected shift in liquidity between now and year-end.

 

Municipal fund net outflows resurge on global risk-off trade

 

Broader credit market uncertainty may prolong muni outflows in the near term.

 

For the period ending 8/3/2011, combined weekly and monthly municipal reporters registered the highest net outflows (-$232mn) since the first week of June. Highyield funds (-$117mn) and long-term funds (-$726mn) also experienced net outflows. Intermediate funds (+$314mn) enjoyed positive flows for the ninth consecutive week.

 

Municipal funds who report weekly were also negative (-$861mn) for the period ending 8/3/2011. High-yield funds (-$118mn), long-term funds  (-$732mn) and intermediate funds (-$55mn) all experienced net outflows (Exhibit 4).

And a quick primer on Chapter 9 bankruptcy protection from DeGroot as pertains to not only last week’s Central Falls bankruptcy filing, but to what me be “hundreds and hundreds” just over the horizon.

And after all that, the conclusion is that there is no conlusion, and only time will tell what will ultimately happen. That said, anyone actually predicting that a historic US downgrade will have no impact, is an idiot.

Read the entire article HERE.