Who is buying the US Treasuries?

[GRG55]

Re: Who is buying the US Treasuries?

It is a good article and well worth reading.

But I assume that households are buying municipal bonds and US treasurys in almost unprecedented numbers with what capital they have.

Whether the numbers are fudged or not, I assume this is true. I can see this from behavior of people I know. They are into bonds in a big way, bonds to park their money in, bonds assumed to be completely safe.

Sprott may be right about this being an exaggerated number, but I know of enough individuals who I believe are into these bonds in a big way.

They are setting themselves up for the next huge capital loss. This is part of the way the collapse of the FIRE economy robs savers and investors and eventually will bankrupt the entire middle class.

I don't know about huge capital losses...I suppose we'll have to see how it plays out....but I am in agreement that what you describe is happening.

I don't think the rising savings rate in the USA is entirely fudged numbers related to deleveraging any more...I suspect there's now a fear-driven real increase in savings underway, and it could be the start of a secular trend. This is what I was referring to in this post:

The shrinking current account gap is positive for everybody...everybody except the Chinese mercantile economy that is...

Although the transistion could be highly disruptive, in the years to come the USA is going to fund an increasing portion of its fiscal deficit with that rising internal savings rate instead of foreign lenders.

If it goes "too far", and the trade and current accounts imbalances shrink too much, too fast, the Chinese economic model and its economy implode. It is their worst nightmare...

If we eventually progress to the point where there's a bear market "revulsion" toward equity investing [and that's not out of the realm of the imaginable any more ] then higher rates of domestically funded Treasury debt seem entirely plausible.

The reason I am hesitant to buy into the "bond holders will soon be crushed by rising interest rates" is because I think the Fed and the Treasury understand full well the need to secure and retain domestic investment support for ever larger Treasury auctions...and will do everything they can to keep a lid on interest rate rises. They know that domestic investors aren't the same as foreign official sector buyers...that the potential for capital losses will send them scurrying, unlike China's PBOC.

[grapejelly]

Re: Who is buying the US Treasuries?

I
The reason I am hesitant to buy into the "bond holders will soon be crushed by rising interest rates" is because I think the Fed and the Treasury understand full well the need to secure and retain domestic investment support for ever larger Treasury auctions...and will do everything they can to keep a lid on interest rate rises. They know that domestic investors aren't the same as foreign official sector buyers...that the potential for capital losses will send them scurrying, unlike China's PBOC.

I don't think they will have any control over rates. I think they don't now. Rates are set by the market. Short term they can do something by buying bonds, but longer term the rates both short and long are set by the market -- recall the "bond vigilantes".

[vinoveri]

Re: Who is buying the US Treasuries?

I don't think they will have any control over rates. I think they don't now. Rates are set by the market. Short term they can do something by buying bonds, but longer term the rates both short and long are set by the market -- recall the "bond vigilantes".

they're a fiction, just ask Bill Gross :rolleyes:

[GRG55]

Re: Who is buying the US Treasuries?

I don't think they will have any control over rates. I think they don't now. Rates are set by the market. Short term they can do something by buying bonds, but longer term the rates both short and long are set by the market -- recall the "bond vigilantes".

"The market" is proving to be wildly optimistic over and over and over again. Did "the market" start pricing the real risk into Dubai's bonds [as just one example], even though it was plainly obvious to even the most casual observer that there were serious problems many months before the latest blow-up? [check the 6th bullet on this post from March 09]

Bond vigilantes seem to be an extinct species...or at the very least they are unwilling to "fight the Fed".

[grapejelly]

Re: Who is buying the US Treasuries?

"The market" is proving to be wildly optimistic over and over and over again. Did "the market" start pricing the real risk into Dubai's bonds [as just one example], even though it was plainly obvious to even the most casual observer that there were serious problems many months before the latest blow-up? [check the 6th bullet on this post from March 09]

Bond vigilantes seem to be an extinct species...or at the very least they are unwilling to "fight the Fed".

Well, it will end when it ends, won't it? Remember the "Goldilocks" economy? I guess it's the nature of these things to be going strongest and appear invulnerable precisely at the point near the collapse or catastrophe.

[GRG55]

Re: Who is buying the US Treasuries?

Well, it will end when it ends, won't it? Remember the "Goldilocks" economy? I guess it's the nature of these things to be going strongest and appear invulnerable precisely at the point near the collapse or catastrophe.

What's that old saying about something that can't continue forever...won't...

[metalman]

Re: Who is buying the US Treasuries?

Well, it will end when it ends, won't it? Remember the "Goldilocks" economy? I guess it's the nature of these things to be going strongest and appear invulnerable precisely at the point near the collapse or catastrophe.

not 1 kid on the fixed income desk of 1 fund is paid $1 to second guess the truthfulness of gov't numbers. second guess wrong & you're fired. go along with all the kids is safe.

[Jay]

Re: Who is buying the US Treasuries?

It goes on until it doesn't, then those who have all the cash, and all the power make new rules in the sandbox that suit them. The public is fed a stream of end of the world scenarios, and it may even appear that way to some, to keep them in line long enough to recreate the game with a new currency. And the gulf grows between TPTB and the Constitution. The public will choose safety, transfats and video games over a real fight. The intelligent minions of the oligarchs get just enough pie to keep them quiet but no way near enough to challenge. I hold out hope for a real reset, but don't see it at the moment.

[Raz]

Sprott has been so epicly wrong so many times...

Would you elaborate on Sprott's track record?

From 2001 - 2007 he was up by more that 30 percent per year (30%+).
He took a 45% haircut in 2008, and unless he sold he took a blood-puke on Timinco, but he's still way ahead now.

[GRG55]

Re: Who is buying the US Treasuries?

Would you elaborate on Sprott's track record?

From 2001 - 2007 he was up by more that 30 percent per year (30%+).
He took a 45% haircut in 2008, and unless he sold he took a blood-puke on Timinco, but he's still way ahead now.

You're correct Raz. Sprott was "epically" right about the commodity run up this decade. Where he fell flat was, like so many of the others that got that call right [e.g. Don Coxe, Jim Rogers], he didn't sell everything and go 100% cash in early 2008. Frankly I can't find anyone in that situation who did [me included ].

The guys with the most speculative holdings in the commodity sector, like Philip Richards at RAB Capital in London, didn't have enough liquidity to get out even if they wanted to...and that was also the case for part of Sprott's holdings it appears.

[phirang]

Re: Who is buying the US Treasuries?

I am as critical of myself as I am of the "pros", as I don't have a salary and can't suck off the OPM teat. FD: the only one I drop everything for is Soros - the rest talk their own book.

My HONEST opinion of Sprott? He's OK: a good, now unemployed(the terms for a lot of jobs are asinine these days) friend of mine average about 24% YoY over 5 years from 2003-2008 at his small hf, and he didn't have the resources Sprott did at his firm.

HOW can you short MONEY SUPPLY, i.e. banks, mtg's, etc, and be LONG commodities??? IT makes NO SENSE! It's like being long fire and water: huh? If you're shorting the SOURCE of CREDIT that FINANCES speculation, how the HELL can you be long the underlying? It just makes me doubt his understanding of basic economics and banking, as presumptuous as it may sound for me to say that, but then again, Rogers comitted an equally egregious offence, being long HY currencies yet short financials... wtf.

``We have an oil problem in the world, and it's called depletion,'' Sprott, 63, told lawmakers in Ottawa today. ``I am not surprised for one second that the price of oil goes up constantly.''
Sprott spoke at a hearing by a House of Commons subcommittee examining soaring gasoline prices. Crude oil for October delivery increased $1.87, or 1.6 percent, to $118.14 a barrel on the New York Mercantile Exchange today, and has jumped 64 percent from a year ago.

Soros was shorting oil when oil hit $134.

If Sprott had better macro-sense, he'd be a trillionaire, buying commodity producers at the bottom this Fall. I'm being very, very critical, but hey, it's my money!

[Rajiv]

Re: Who is buying the US Treasuries?

Also from Ilargi on the Automatic Earth today - Eyes wide open and pedal to the metal

Ilargi: On Christmas Eve, in No Morals, No Hazard, I talked about Eric Sprott’s report "Is it all just a Ponzi scheme?", which suggests that $704 billion in purchases of US Treasuries cannot be accounted for, since they are on file as purchases by what the Federal Reserve Flow of Funds Report labels the "Household Sector", which, it turns out, doesn't exist. It's merely a name under which all unknown purchasers are grouped, while remaining unknown. The purchaser may be the Fed itself, unwilling to admit to more purchases than are already on file.

Alternatively, as someone suggested, the Treasuries may never have been issued in the first place, and the entire thing may be an empty charade aimed solely at keeping up the appearance of a functioning US sovereign debt market.

This possibility, which Sprott failed to mention, opens up whole new vistas, and would certainly lend a lot more credence to the idea that US finance policy, as designed and engineered by the Treasury Department and the Federal Reserve, is indeed nothing but the giant Ponzi scheme Sprott suspects it may be.

The Tyler Durden collective at ZeroHedge takes Sprott’s suspicions a step or two further, one might say, in a little directive called "Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else".

Durden looks at what the net issuance of US fixed income has been in 2009, after you subtract the part purchased by the Fed (which is after all not a real purchase, but just money going from one's left pocket to the right one, I’ve used the metaphor numerous times in relation to US financial policies).

What Tyler Durden then finds is that net US$ denominated fixed income issuance was only $200 billion this year. For 2010, though, since the Fed is set to leave the scene stage left along with Quantitative Easing sometime early spring, over $2.06 trillion will have to be sold to parties other than the Fed. Durden:

Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion.

The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010.

Now, let's be clear: it's entirely unclear who the buyer of the $2.06 trillion will be. Not only do the usual suspects, China, Japan, have increasing doubts about amassing USD denominated paper including Treasuries, Japan also plans to be as aggressive a seller as the US. And of course there are many other countries who desperately need to sell sovereign bonds in order to pay for get their often already accepted and implemented budgets. And that's just the nation states. Corporations and lower levels of governments, in every nook and cranny of the planet, wants to sell you their debt. Badly.

Obviously, this will drive up interest rates on all this debt. It's impossible to foresee at this point how high the rates my rise, but it looks to be painfully obvious that there will be a lot of pain involved.
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