Treasuries and USD Not Crashing. Yet.

[Master Shake]

Good read from Brad Setser. Make sure to read the comments as well.

http://blogs.cfr.org/setser/2009/05/...-record-angst/

[Slimprofits]

Re: Treasuries and USD Not Crashing. Yet.

Was any previously undiscovered ground covered in this article? Think I read ten different versions of it this week, including one by David Rosenberg.

As readers of itulip we knew this already:

Foreign central bank demand is still concentrated at the short-end of the curve,* and the US is issuing more long-dated bonds.

No evidence of this, just a hunch, but it seems as if Setzer has a dog in this race.

May 29th, 2009 at 1:54 pm
John McLeod responds:
Demand for Agency Debt by the cenbanks was falling off a cliff all right, until Dec 31st. Since then their holdings have been almost completely flat. Wednesday’s figure is down a vanishingly small $0.008 billion net change for the whole year to date.

If not, why is this important factoid left out? Brad is an expert, right?

[c1ue]

Re: Treasuries and USD Not Crashing. Yet.

Setser is a smart guy and does good research/projections, but he IS CFR.

Huge grains of salt.

[jk]

Re: Treasuries and USD Not Crashing. Yet.

an interesting piece, and so is the one by tim duy, referred to by sestser and in the comments

duy's piece is longish, and a bit technical, but points to important things going on, embodied in the recent back up in long treasury rates, coupled with rising commodity [especially oil] prices.

quick summary, fwiw, as i read it -

1. the fed is trapped.

2. it wants to support the housing market, but mortgage rates are going up again along with long treasury rates. but if the fed chooses to buy more treasuries directly, i.e. quantitatively ease to keep long rates lower, it both undermines the spread the banks are riding to earn their way out of the hole they're in, and it increases inflation fears - especially by foreign cb's- and thus increases the risk of a run on the dollar, further selling of already issued long treasuries, and an even sharper spike in commodities.

3. otoh, the rise in commodities will feed into inflation and inflation expectations in spite of labor weakness and low capacity utilization. but that underlying weakness makes the fed loath to tighten.

4. so the fed can't tighten, and it can't [quantitatively] ease without causing more instability.


my own conclusions, derived from but not in the duy piece:

1. the fed will continue to purchase mbs to support the mortgage market as best it can. that will reduce the spread between mbs and treasuries, but it would be quite an interesting and unexpected and unlikely shock were mbs rates to go below treasuries. that would be a sign of huge distress. so their ability to intervene in the mbs market is limited, as [rising] treasury rates provide a [rising] floor for mortgage rates.

2. the weak dollar dynamic is back until or unless we have another crisis. the dollar will continue to drop against currencies which are not manipulated to weaken them vis a vis the dollar. i.e. the euro and yen will show strength, putting pressure on eurozone and japanese exporters. commodities will continue to rise in dollars. [only until or unless we have another crisis, remember]

3. during the next crisis [don't you think think there'll be another crisis?] the performance of the dollar will be telling indeed.

[c1ue]

Re: Treasuries and USD Not Crashing. Yet.

JK,

You might have already noted that the dollar - followed by the yen - is falling now.

But what is more interesting is that outside of those 2 currencies, the rest of the world seems to be holding steady against each other even if rising against the dollar.

[jk]

Re: Treasuries and USD Not Crashing. Yet.

JK,

You might have already noted that the dollar - followed by the yen - is falling now.

But what is more interesting is that outside of those 2 currencies, the rest of the world seems to be holding steady against each other even if rising against the dollar.

you're right. and re-reading my post, i'd delete the notion that the yen rises relative to the dollar. the japanese are interventionists, plus mrs watanabe is always looking for more yield as long there's no crisis at hand. but is what you're saying accurate, c1ue, for the yuan?

[aaron]

Re: Treasuries and USD Not Crashing. Yet.

If the Japanese have been printing money like crazy over the years, and with the huge currency carry trades that used yen, is the reversal of this carry trade going to cause massive inflation in Japan? Or, as this already played out?