Posted on 01/11/2009 11:46:18 AM PST by Golddigger3
On both sides of the Atlantic, investors are finding very different experiences when buying country-specific debt. Wednesday, Germany sold €4 billion ($5.49 billion) of debt, but low demand forced the Bundesbank, Germany's central bank, to retain about one-third of the issue.
That fueled concerns that subsequent auctions from Spain, France and the U.S. also would fall short of expectations and be a sign that the global market was starting to balk at government-bond issuance. It would be especially troubling for the U.S. The vast lending and spending undertaken by the U.S. Treasury Department and the incoming Obama administration will have to be financed through the sale of more debt.
Bank of America estimates a $2.14 trillion financing need for fiscal 2009 and $1.02 trillion for 2010. And investors have been fearful that other countries will tire of being U.S. benefactors and will demand higher yields or sell Treasurys en masse, weakening the U.S. dollar.
But Spain and France held successful auctions, and the U.S. Treasury's sale Thursday of $16 billion in 10-year notes was marked by stronger-than-expected demand. "The strong across-the-board performance for this reopening should in the near term provide some solace that 10-year Treasury paper in the U.S. still has a strong following," wrote George Goncalves, Treasury and agency strategist at Morgan Stanley.
Jessica Hoversen, . . . analyst at MF Global, doesn't expect China or Japan to sell off their holdings of U.S. Treasurys, "If China decreases dollar holdings, they're putting dollars in the market and taking back yuan," she said,"which their economy cannot handle right now."
(Excerpt) Read more at online.wsj.com ...
Can anybody tell me whether this has happened before to Europe’s biggest economy?
Peter Schiff says the Treasury bubble is collapsing as we speak. He says it’s like the condo bubble. Nobody is buying Treasuries to live in them, there just buying them so they can flip them to the government which guarantees them.
Here’s Peter Schiff’s column from Friday explaining how the Treasury bubble is collapsing:
THE FED’S BUBBLE TROUBLE
A few weeks ago when the Fed announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally. To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff’s social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of “buy the rumor and sell the fact”.
If it is well known that Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.
The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.
This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.
However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Fed’s bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board.
In order to “save” the economy from these high rates the Fed will then have to expand its purchases to include all forms of debt. If that happens, run-away inflation will quickly turn into hyper-inflation, and our currency will be worthless and our economy left in ruins.
To avoid this nightmare scenario, the Fed should pull out of the bond market before it’s too late and let prices fall to where real buyers, those willing to hold to maturity, re-enter the market. Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.
But we should know that the bursting of the bond market bubble will have even more dire consequences than the bursting of prior bubbles in stocks and real estate. Significantly higher interest rates and inflation that will result will severely compound the current problems. Imagine how much worse our economy would be if we faced double digit interest rates? In addition, not only will homeowners be confronted with record high mortgage rates, but the Government will be staring at trillion dollar annual interest payments on the national debt, making interest by far the single largest line item in the Federal budget. Just like homeowners who relied on teaser rates, the Government will face a similar problem when all its low-yielding short-term debt matures.
The grim reality of course is that when the real estate bubble burst the Government was able to “bail-out” private parties. However, when the bond market bubble bursts, it will be the U.S. Government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyper-inflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoff’s clients might finally find some comfort.
Mr. Schiff is president of Euro Pacific Capital and author of “The Little Book of Bull Moves in Bear Markets”
This may be good news. If Obama can’t sell Treasuries to finance his expansion of govt., he may be forced to raise taxes. Then, he will come under the scrutiny of the people. Then also, we will see how much those who voted for him will really love him after he does that.
Here’s Peter Schiff on TV explaining the collapsing Treasury bubble:
http://watch.bnn.ca/trading-day/#clip127416
The difference is that Germany doesn’t have a print-happy central bank promising (in so many words) to print money to buy bonds if need be like Bernanke is doing. So Germany’s bond market is actually a competitive marketplace instead of a rigged, central bank-created, bubble marketplace like we have.
Beat us to it.
The only thing he will be able to sell is empty talk to the MSM. Let’s see how long that keeps people satisfied.
Until the public discovers how much worse off (relatively) big EuroZone banks are than are US banks, Bunds, BOBLs, and Schatzes don't really have a problem other than that Eurocurrency is going to take a hit this year.
I thought I read weeks ago that no one wanted to buy germany’s bonds anymore. I think this has been going on for a couple of months.
Another article from same issue of WSJ suggesting that the dollar may collapse:
This article has a misleading healine since the dollar fell against the yen and the experts they quote say the dollars is weak and that the advance agaist other currencies is not to be trusted:
Dollar Advances Against Euro
The dollar stengthened against the euro after the U.S. December employment report wasn’t as bad as some had feared.
The dollar broke through a series of session highs against the euro as buying momentum built during the session.
The greenback briefly erased losses versus the yen before resuming its downward move as U.S. stocks declined.
“It is a short-term relief for the dollar,” said Sebastien Galy, senior currency strategist at BP Paribas Securities SA in New York. “People have positioned for a worse number. But it didn’t change the fact of a deteriorating labor market.”
The selling of the euor against the dollar also pushed the common currency down against the yen and the pound.
In late Friday afternoon trading in New York, the euor was at $1.3431, compared with $1.3726 late Thursday, and the dollar moved to 90.24 yen from 91.17 yen. . . .
Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, said the dollar’s rally Friday was more of a “relif trade” than an outright vote of confidence.
Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp. in New York, said that deteriorating economic dundamenals in the U.S. and overseas added to risk aversion, thereby benefiting the yen and the dollar as haven currencies.
Strength isn’t necessaryily a good thing for the yen or its regional counterparts. Asia’s central banks are currently accepting a decline in the value of their currencies in an effort to support exports, the latest foreign-exchange reserves data suggest.
At least among the subset of his voters who actually pay taxes, as opposed to those who are subsidized by taxpayers.
Yes. There were seven bond auction failures for German sovereign paper last year.
This one, however, was the largest shortfall in bidders in about eight years.
There have been other sovereign paper auction failures in Europe — the Netherlands, for example.
It isn’t the end of the world, but it does predict that nations issuing debt will need to start increasing yields on their paper in order to attract buyers of bonds. 3.19% in German paper isn’t enough to take on the risk of the Euro and EU-wide machinations. The US has no trouble selling short-term debt for lower yields, probably because our paper is perceived as safer.
I'm new to following national debt. Would you mind elaborating:
1) on why a country not be able to sell 1/3 of it's debt offering is no big deal;
2) on how dangerous the U.S. treasury situation is. Thanks
Option 3 (taking a chainsaw to the Welfare State) is not considered to be on the table, but is the only thing that would work.
True that. I have yet to see a Congressman seriously suggest cutting our bloated socialist system and take the axe to medicare, medicaid, social security, etc. Instead they talk of reforming the social programs that are destroying us. How do you reform cancer?
Sometimes the central bank simply gets its timing wrong and the usual buyers have just purchased a slug of debt. Sometimes they misprice the offering (Spain and Italy used to be renowned for doing exactly this, btw). In any case there's obviously no immediate problem, as shown by Bund and BOBL futures this week. If there were any sort of serious problem, Bunds would've been down at least 2 handles and likely more. Later on, if the situation persists, who knows?
Your second question:
Very.
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Be careful of reasoning, esp. about bonds, from ONE data point, as you appear to be doing in the current instance. One-off events occur in debt mkts with surprising frequency.
Right you are, Dave. No new news here — remember some of Ita;y’s auctions in the ‘90s? (chortle!!)
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