What makes this significant? Primary Dealers now net short U.S. Treasuries

[Slimprofits]

http://www.bloomberg.com/apps/news?p...d=aCZ5T8_MwuOA

By Liz Capo McCormick

Sept. 8 (Bloomberg) -- Wall Street’s biggest bond dealers are loosening their grip on U.S. government debt at a record pace, signaling a continued rally in credit markets.

Holdings of Treasuries by the 18 primary dealers of U.S. government debt that trade directly with the Federal Reserve fell to a negative $10.5 billion last month -- a so-called net short position -- from a record net long of $93.6 billion in June, according to data compiled by the central bank.

The fastest turnaround since the Fed began tracking the data in 1997 shows dealers are purchasing and financing higher- risk debt even as investors express doubt about the economic recovery. Dealers typically place bets against Treasuries to hedge corporate and mortgage bonds, and net short positions averaged $63 billion in the 10 years before the collapse of subprime home loans caused credit markets to freeze in 2007.

“It’s money going back to work again in some level of riskier assets,” said Donald Galante, the chief investment officer and senior vice president of fixed income at New York- based MF Global Ltd., a broker of exchange-traded futures. “Panic has receded and you are in a more normal world, with dealers starting to take on a little bit more leverage. They are taking on some inventory in the corporate world and hedging with Treasuries again.”

The two-month decline in net positions was interrupted last week, as net longs rose to $16.2 billion. The amount remains almost 60 percent below the weekly average this year.

[sunskyfan]

Re: What makes this significant? Primary Dealers now net short U.S. Treasuries

The fastest turnaround since the Fed began tracking the data in 1997 shows dealers are purchasing and financing higher- risk debt even as investors express doubt about the economic recovery.

It means welcome to moral hazard and un-intended consequences. If I knew the government was going to give me free money to make money and even more when I fail tell me what higher-risk debt means?

[Starving Steve]

Re: What makes this significant? Primary Dealers now net short U.S. Treasuries

Could anyone please explain to me why anyone (except the Fed) would buy U.S. bonds to-day which pay nothing but have subtle and growing risks: inflation and higher interest rates possibly ahead?

I only like nice simple sentences, without Greenspanese.

The only way one could win with bonds now is thru deflation, but that is very uncertain, especially in long bonds.

Yes, controlled slow deflation is what we all want, but I doubt the Federal Reserve would bless the bond buyers with such a scenario. What am I missing here? And even if the Fed wanted to deflate, they have deficits to fund, so they can't deflate.

Warren Buffet, according to Bloomberg to-day, is moving into bonds and out of stocks. What is going on? At least with stocks, one gets dividends, especially in energy stoxx. So what am I missing? What does Buffet see that I do not see?

The Fed and the other central banks are in an INFLATION-TRAP; they couldn't deflate even if they wanted to deflate. And Bernanke and the other central bankers got into this inflation-trap thru their easy money policies. They now have to fund their deficits, come hell or high-water, and deflation makes the deficits impossible to fund.

Back to the original question: why would anyone buy bonds except for the central banks themselves? Then why would Warren Buffet join Bernanke in buying bonds????????????

And if negative nominal interest rates come next, stock dividends get even more delicious. Stock prices would move up, too. Therefore, bonds sink in value, especially govn't bonds sink in value.

There is no escape; the Putz from Princeton has got himself into an inflation-trap.